House Bill Calls for Creation of Crypto-Less, Privacy-First Digital Dollar

A new bill seeks to purge not just blockchain, but all digital ledgers from the digital dollar.

Rep. Patrick Lynch (D-Mass.) and four Democratic colleagues announced the “Electronic Currency And Secure Hardware Act” (ECASH Act) on March 28, seeking to hand the responsibility for creating a digital currency to the Treasury Department rather than the Federal Reserve, which issues fiat dollars.

Rather than building a central bank digital currency (CBDC) on blockchain, the electronic dollar would be a digital token — a bearer instrument just like paper currency, meaning that if it’s lost, it’s gone.

The eCash would be legal tender, and it would also not need internet access to transact — a big Achilles’ heel of CBDC design. That’s because there would be no blockchain upon which to write immutable, or unchangeable, transactions.

No Blockchain Required

While the creation of a U.S.-issued CBDC is far from certain — neither the treasury secretary nor the chairman of the Federal Reserve has even come out with an opinion about the need and desirability of a digital dollar — the discussion has largely assumed that it will be built on blockchain.

If not blockchain, it was expected that it would at least be on the distributed-ledger (DLT) that bitcoin and other cryptocurrencies are built on. A recent test by the Boston Fed and MIT’s Digital Currency Initiative found that blockchain might not be the fastest or most scalable platform for a CBDC, but the winning solution did use DLT.

See also: Boston Fed, MIT Digital Dollar Test Casts Doubt on Blockchain as Processing Platform

It’s worth noting that cross-border payments firm Ripple’s XRP cryptocurrency is technically a blockchain. Additionally, IBM Blockchain’s Hyperledger Fabric technology is not a true blockchain. However, they are most definitely DLTs.

Lynch’s bill is co-sponsored by fellow Reps. Alma Adams (D-N.C.), Chuy García (D-Ill.), Ayanna Pressley (D-Mass.) and Rashida Tlaib (D-Mich.). While the bill wouldn’t necessarily replace a blockchain-based CBDC, the pilot program the ECASH Act calls for within 90 days after passage would complement and advance the efforts undertaken by the Federal Reserve.

That CBDC project was promoted heavily in President Biden’s March 10 executive order on cryptocurrency, requiring agencies to come up with a proposal by September.

How Private is Private?

While the name won’t bring any joy to gaming industry payments processor ecash Holdings — which casino gaming company Everi Holdings agreed to acquire in February — it should bring joy to the hearts of privacy advocates.

Because there would be no digital ledger recording each transaction, it would be difficult — in theory — to track transactions across a blockchain like bitcoin. However, both law enforcement and criminals are discovering is not truly anonymous, but rather pseudonymous, and with the proper resources, it’s not nearly as hard to connect to a user as previously thought.

Read more: PYMNTS Crypto Basics Series: Is Bitcoin Really Anonymous and How Can Law Enforcement Track It?

The bill calls for eCash to “replicate the privacy-respecting features of physical cash” to the greatest extent possible, imposing no more anti-money laundering (AML) requirement than cash.

In theory, this bearer instrument status would reduce, if not eliminate, the severe privacy concerns highlighted by China’s decision to create a digital yuan with “controllable anonymity.”

Related: Fed’s Digital Dollar Report Finally Drops, With More Questions Than Answers

But that means it probably couldn’t have what the Federal Reserve called “the transparency necessary to deter criminal activity” — at least in theory, anyway. It’s hard to see how any digital token with some kind of serial number would not be far easier to track than a paper bill.

That balance is something mentioned prominently in the executive order, which calls for a parity between the need for privacy and the ability to prevent “illicit finance and national security risks.”

See also: Biden’s Executive Order Set to Fast-Track Crypto Policy

Coming from Lynch, the bill has an interesting pedigree. The Massachusetts Democrat is a member of the House Financial Services Committee, which has been holding hearings on everything from crypto policy and stablecoins to the digital dollar, and chairs its Task Force on Financial Technology.

Hee is also chairman of the House Oversight Committee’s Subcommittee on National Security, and sits on Financial Services’ National Security, International Development and Monetary Policy Subcommittee.

This makes him an interesting choice for author of a bill creating a currency designed to “replicate the privacy-respecting features of physical cash” as much as possible — something that does not match the desires of both law enforcement and intelligence agencies.