This op-ed ran in the Wall Street Journal on October 15, 2019
America was complacent about its technological dominance until the Soviets’ 1957 Sputnik launch woke us up. Recent developments in digital currencies similarly threaten the dollar’s dominance, and Washington policy makers are taking notice.
Significant actors, including central banks and social-media platforms, may launch new currencies in the next few years. As their networks grow, they could eventually erode the dollar’s status as the most popular currency for international exchange. Incidents like the attempts of foreign states and companies to circumvent U.S. sanctions show the growing demand for exchange systems outside the U.S.-led world currency regime.
Such a shift would mean trouble for the U.S. Since World War II and the decline of the British pound sterling as the backbone of global trade, the U.S. has benefited from sponsoring the world’s primary reserve currency. Guiding the global economic order has helped the U.S. stabilize prices of food and energy, sustain low borrowing costs for home and business loans, combat illicit finance, drive global demand for U.S. government debt and promote commerce.
The emergence of unchecked rival systems could undermine these benefits. Whether a network of Beijing-dependent states trading a digital yuan or a commercial venture’s token backed by a basket of global currencies, a challenger to the U.S. dollar could end the delicate world economic order Americans have long taken for granted. Complacency in the face of this threat risks lasting damage to the U.S. economy.
We propose a digital dollar—a government-sanctioned blockchain protocol, created and maintained by an independent nongovernmental group but administered by banks and other trusted payment organizations. Cash brought into the system would be exchanged for digital U.S. dollars on a blockchain, with the cash lodged in special escrow accounts maintained by the Federal Reserve.
The system could start with a pilot program: People could use their preferred provider’s smartphone app to buy digital dollars, then use them in daily transactions. This mechanism could ultimately digitize the dollar in both domestic and international transactions.
What are the benefits of this system? This new payment network would still rely on trusted, regulated intermediaries to maintain digital wallets and validate transactions. But it would also let individuals, companies and states tap the potential advantages of distributed-ledger payments, such as much higher transaction speed, enhanced access and greater transparency. This should mean lower costs for businesses and consumers and new economic models based on real-time transactions and micro-payments.
Security would be another major advance. Because no individual validator of the payment ledger would hold complete information regarding all payments, the system would solve some of the privacy and antitrust concerns that arise when a single intermediary—like WeChat or a foreign central bank—holds complete information.
Most important, compared with a private or foreign digital currency, this system would extend the central role of the U.S. dollar in global finance and allow it to compete confidently in the new digital era. The first major digital-currency initiative to draw American users would be fully and unequivocally backed by the greenback.
This new digital-currency regime would require the support and participation of key actors including the Fed, along with the commercial banks, nonbank intermediaries, technology innovators and social-media platforms. Its independent protocol would prevent conflicts of interest, deploy the best available technology and gradually expand the network to more participants, both foreign and domestic.
No perfect solution exists to address the challenges and promises of digital currency, nor can anyone predict all the technological advances these efforts will generate. The same was true when President Eisenhower proposed the National Aeronautics and Space Administration and when President Kennedy vowed to put a man on the moon. America must once again establish a team of the world’s brightest minds, this time to update a global economic order that ensures our freedom and prosperity.
Mr. Giancarlo is a former chairman of the Commodity Futures Trading Commission. Mr. Gorfine is a former chief innovation officer of the CFTC and an adjunct professor at the Georgetown University Law Center.