The year after Satoshi Nakamoto put out a white paper on a concept for a new peer-to-peer currency called bitcoin (BTC-USD), Jonathan Dharmapalan realized that digital currencies are the future.
The entrepreneur, a trained electrical engineer, spotted companies involved in electronic money flourishing all over, as people learned to transact electronically using apps and mobile phones. It occurred to him that governments around the world would eventually want to get in the game and create their own digital currencies.
Dharmapalan is chief executive of eCurrency – a firm at the forefront of creating technology to execute a central bank digital currency (CBDB), part of cryptocurrency’s next frontier. His company has been advising the U.S. Treasury and the Federal Reserve for nearly a decade on how to create a CBDC.
With investors ranging from Ray Dalio to Vikrim Pandit, Dharmapalan advises central banks around the world like the Banks of England and Jamaica, the latter having just launched its own central bank digital currency.
As the Federal Reserve weighs whether to launch a CBDC with a forthcoming paper on the pros and cons of a digital dollar, Dharmapalan says designing a central bank digital currency depends on the existing legal framework.
“Our perspective is that currency is the law,” Dharmapalan said in an interview with Yahoo Finance.
“Every nation or monetary union has a foundational law that defines what their currency is. So if you’re thinking about a digital form of currency then the law must accommodate its existence,” the executive added.
Under his interpretation, if the U.S. were to pursue a digital dollar, then Congress would have to authorize the Treasury and the Federal Reserve to issue and distribute it first.
‘Cook up a different set of rules’
According to Dharmapalan, Treasury and the Fed have said a central bank digital currency would probably work in the same way paper money is created and issued, the thinking goes — though there’s no consensus within the U.S. government yet about how to go about doing it.
Dharmapalan thinks the odds are the current law will be extended to apply to a digital form of the dollar and that the existing infrastructure should be used.
“Could we cook up a different set of rules for digital currency? Maybe,” he suggested. “But the odds are we’ll rely on how currency has been defined in the past,” he added.
Under the current currency system, the Treasury prints the money and hands it over to the Fed, which circulates the currency in the economy, leaning on banks – from Bank of America to local banks – to get cash into the hands of people.
Likewise, with a digital dollar using the current system, Treasury would need to securely mint it, then hand it off to the Fed to circulate, mostly likely through commercial banks and other financial players. It would then float to people through digital ATMs or cards or smartphones.
A CBDC likely wouldn’t use blockchain or even a ledger: Dharmapalan says it would function like a physical dollar, which has no ledger. The Treasury would create a secured digital instrument that’s so cryptographically secured that it could float around digitally, where the value is contained in itself.
Dharmapalan says the best way to think of it is as a photograph that can’t be counterfeited or changed. “If I’m holding a photo and I send it to you, once it’s sent then I don’t hold the photo anymore,” he says.
Maintaining Americans’ privacy with a CBDC is key. The currency is secured through something called a cryptogram, that’s secured with multiple layers of cryptography — i.e. lots of public and private keys that enable high levels of security.
While not impossible to duplicate, it would be very difficult, similar to paper bills. Physical currency has signatures from the Treasury Secretary and the Comptroller of the Currency, various colored threads, a reflective portion and a digital watermark make it difficult to counterfeit.
“If we want it to be ubiquitous, digital currency must be available through ATMs, cards, smartphones and anything new we can think of. Creating access to anyone is key,” he explained.
One way, Dharmapalan suggested, is creating accessibility via inexpensive smart cards that aren’t any more sophisticated than a transit card — so that everyone from school children to someone without a bank account can use them.
The card could have a magnetic strip or smart chip and the person could just stick it into a machine to put money on it. Another option is putting Bluetooth on the cards so that people can bump cards, and send money directly to each other between cards.
It also has to perform the same thing in all hands and have the ubiquity and the fungibility to settle debts between two parties instantaneously, by executing that value and moving it in the blink of an eye.
“A $5 bill in my hand needs to buy the same thing that your $5 would buy,” he says. He added, “If you give me bananas and they’re $3.85, I should be able to give you $3.85 and then be able to walk away – it must exchange on a person to person basis. Right now, the only thing that works that way is paper bills and coins.”
Unlike private cryptocurrencies like bitcoin, a U.S. central bank digital currency would be issued by and backed by the Fed, just as U.S. paper dollar bills and coins.
Dharmapalan explained that Jamaica is a good model for the U.S. to follow. The government is in the process of creating new laws to authorize its central bank to issue a digital currency.
The Bank of Jamaica minted its first batch of digital currency in August, which it is testing. Next, it will issue that batch to commercial banks, which will test with consumers before establishing new criteria by December. Officials are looking to the first quarter of 2022 for the national roll out.
Initially, Jamaica’s virtual currency will be offered through an app on the phone, and citizens will access through a digital wallet.
So how long it could take the U.S. to adopt a CBDC?
Dharmapalan stated the technology is ready now, it’s just a matter of Congress and government agencies coalescing around a concept. Yet Fed officials are divided on whether to adopt a central bank digital currency.
Advocates, including Fed Governor Lael Brainard, say a CBDC will help get relief payments to Americans and states hit with natural disasters faster, while also helping the unbanked. The Fed plans to launch the review by releasing a paper analyzing the issue and seeking public comment, but it is unlikely to include a firm policy recommendation.