Tokens and Transactions Underpin Digital Currency
According to Gorfine, the effective deployment of digital currency comes in two parts: tokenization and transaction. Tokenization gets the top spot: “A U.S. CBDC would rely on an actual token that makes each issued dollar a unique asset. A single dollar would be a unique dollar in both the digital and physical worlds.”
Robust cryptography is required to achieve this mint-condition mandate, because each digital dollar must be individually identified and signed.
“When you talk about digital currency being central-bank issued,” Gorfine says, “you’d have to have the Federal Reserve involved in minting a tokenized form of the dollar.”
Next are transactional rails for tokenized governance. “You need to decide what rails and governance you will use to transact this tokenized asset,” says Gorfine. “You could create a centralized database of sorts where transactions are logged, or have an entirely public ledger system. You could also have permissioned ledger systems that fall somewhere between these two ends of this spectrum.”
Electronic currency isn’t a new concept; many Americans already manage their money through mobile or web-based financial portals. When it comes to “commercial bank money,” however, banks operate as middlemen and manage ledgers to facilitate transactions and decrease risk.
Central Bank money — currently available as cash and coin or as reserves —becomes commercial bank money when it’s deposited into an account with a bank or credit union. With commercial bank money, the counterparty is the bank, not the Fed.
A CBDC would be a third form of Central Bank money and could be distributed to individuals either directly by the Central Bank or through banks (as is done today with physical cash through an ATM owned by your bank). Under either distribution model, a digital currency transaction could happen in real time, 24/7.
According to Ron Quaranta, chairman and CEO of the Wall Street Blockchain Alliance and a member of ISACA’s Emerging Trends Working Group, a federalized digital currency offers the potential to remove financial intermediaries and “participate in the exchange of economic value directly with a counterparty.
“As technology gets better,” says Quaranta, “the need for heavy intermediaries is beginning to evaporate. It may be possible for the government to interact directly with citizens and remove friction from the system.”
Digital Currencies Give Governments and Citizens Flexibility
Three thousand years ago, cash was king. “Coins were a low-cost, easy way to settle transactions instantaneously,” says Gorfine. “But as humans became more complex, they could not simply hand another a physical token. Account-based systems helped solve this problem and modernize economies.”
For Gorfine, federal CBDCs come full circle by combining the instantaneous advantage of physical tokens with the ledger-based benefits of data-driven digital accounting.
Ultimately, the creation of defensible and distributed digital currency isn’t just about getting faster payments to citizens — it’s about giving citizens more economic agility with the use of these technologies.
Quaranta puts it simply: “Digital currencies empower people to directly own their economic identity.”