Fintech

 

The Central Bank Digital Dollar (“CBCD” or “Digital Dollar”) is the revolutionizing tool whose time has seemingly come. The establishment of the Digital Dollar as a legal tender instrument on par with the paper dollar (cash-based instrument that we are all familiar with) was almost finalized as part of the just concluded CARES Act passed in response to the COVID 19 but has now been made into a centerpiece of the Automatic Boost to Communities (“ABC”) Act currently making its way through Congress. The Digital Dollar encompasses many of the key elements of Blockchain technology that are available in exotic instruments like Bitcoin or Ethereum (and other such “crypto currencies”) into a payment platform and a digital coin that has the stamp of official legal tender of the United States. The Digital Dollar also has some significant differences with the blockchain-based crypto currencies (like BITCOIN) in that the Digital Dollar will exist around a private ledger controlled by the Federal Reserve, a centralized and closed network, whereas BITCOIN, for example, is completely decentralized and open to new and anonymous participants.

 

The big leap that the Digital Dollar brings versus the paper dollar is that it can essentially allow every American person or business to have a direct account at the Federal Reserve thereby consolidating many functions at the Federal Reserve and eliminating the need for most of the retail banking services provided by banks and other intermediaries in the paper dollar. For example, a digital payment between a person and a business would immediately complete or reject without the need for a middle man like a Paypal, Square, Visa, or a retail bank. The only significant role of a bank / financial intermediary in a paper dollar framework that would be transferable to a Digital Dollar framework would be the role of Wallet Keeper – with The Wallet being a tool to help the person or business to keep count of the money and transaction history.

 

The technical feasibility of these features is very much realizable and, in fact, a large-scale digital currency pilot is currently being run by the Central Bank of Sweden with a full nationwide implementation targeted for as soon as 2021.

 

All the specific implications for banks, financial intermediaries and retail businesses of the implementation of the Digital Dollar are too numerous to list but, for the sake of brevity, two key implications that would be foundational for information technology planning are:

 

1.) The elimination of most core services (and related fee income) performed by retail banks and payment platforms: The federally mandated creation of a digital dollar and a digital wallet – the digital wallet being an account essentially linked to the federal reserve bank – brings with it a reduction in or the wholesale elimination of paper cash-account related operational fees such as minimum balance fees.

 

2.) Greater competition to capture and service the customer: the tokenization of currency will usher in a wider variety of competitors into the banking sphere. The digital wallet can be provided, serviced and branded by entities whose traditional core business would range from supermarket chains (such as Walmart) to smartphone makers (like Samsung) to software platforms with high customer engagement (like Lyft) or restaurant chains.

 

The work of preparing financial institutions to be competitive and effective in the framework of the digital dollar is something that we at AvistaTech have been doing over the years and we are deeply committed to helping companies that want to leverage the coming digital money framework to explore how they can most productively do so. Given the implications that we’ve outlined previously, several areas stand out as critical to staying ahead of competitors namely cloud computing, artificial intelligence and data analytics.

 

Andrew Igharo

 

For more information about our Fintech practice, please reach out to us at aigharo@avistatech.net.