TECHNOLOGY DEVELOPMENT OF DIGITAL CURRENCY.

• Author: Narnia, Neha

We often spend a lot of time talking about the regulatory aspects of what a digital currency might look like, or the economic aspects. But if we take a look at the largest companies, the most influential on our ways of life, they're tech companies. Technology is incredibly important and influences what we can do with policy and what kinds of functionality we can even enable. So, what I hope to tell you today is a little bit about how I'm seeing the technology development of digital currency.

Digital Payments Today

To start, let's recap where digital payments are today. Digital payments are really, at their essence, just the transfer of information. It should be extraordinarily cheap, easy, and universal to make a digital payment. Yet retail transaction costs are anywhere from 0.5 percent to 0.9 percent of a country's GDP, depending on the country (Hayashi and Keaton 2012). This is a huge amount. About seven million American households don't have bank accounts, so that means they don't have access to digital payments (FDIC 2019). And our existing payment systems are, I would argue, woefully behind. Think about how easy it is for you to send a photo to a friend in another country. It's trivial: you get an email address or an SMS phone number; and you know that you're going to be able to send that photo. But think about sending a small payment: you both have to agree on a service; you have to think about exchange costs; and you have to think about fees. It can be really difficult and slow to do this type of thing.

I don't think that this is going to be very easy to fix if we leave things the way they are because, unfortunately, large-scale change requires coordination among many different stakeholders. The way the system works today is the way that it's worked for decades. The system was built at a time when it was unfeasible to think about settling hundreds of millions of transactions instantly. It was built at a time when the technology wasn't there, so we had to think about things like netting and batching. The technology has advanced, but the architecture of the system--the structure--has not advanced with it.

I would argue we have a very good payment instrument right now that we should go back to and take a look at some of its features. A lot of people, when thinking about central bank digital currency (CBDC), approach it from the perspective that we have digital money in the form of central bank reserves and perhaps we should give more people access to the reserves. I would argue that another really interesting framework and approach is that we have coins and dollar bills--$2 trillion worth--and they're very useful. Can we think about digitizing these things?

Cash is universally accepted and...