Dems Propose Privacy-respecting Digital Dollar

House Democrats on Monday plan to introduce a law bill that calls for the development of an electronic version of the US dollar that has the same legal status and privacy expectations as physical currency.

The bill, titled Electronic Currency and Secure Hardware (ECASH) Act, would direct the US Treasury Department to establish a program to coordinate the development and implementation of e-cash and the technology necessary to support it, such as cryptographic hardware.

Sponsored by Rep Stephen Lynch (D-MA), Chairman of the Task Force on Financial Technology, and by Rep Jesús "Chuy" García (D-IL), who serves on the Committee on Financial Services, the ECASH Act represents a response to recent calls by the US Federal Reserve and the Biden administration to promote the development of digital assets.

In a draft press release seen by The Register, Rep Lynch said that with more than 90 countries worldwide investigating or implementing some form of Central Bank Digital Currency (CBDC), it's critical for the US not to be left behind.

"By establishing a pilot program within Treasury for the development of an electronic US Dollar, the ECASH Act will greatly inform, complement, and advance ongoing efforts undertaken by the Federal Reserve and President Biden to examine potential design and deployment options for a digital dollar," Lynch said.

In early March, President Biden issued an Executive Order calling for responsible development of digital assets. And in January, the Fed published a paper titled, "Money and Payments: The US Dollar in the Age of Digital Transformation" [PDF], that explores CBDCs and other forms of digital currencies.

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Rohan Grey, assistant professor of law at Willamette University, provided advice on the drafting of the bill and told The Register that unlike other digital dollar proposals, e-cash would not be issued by the US Federal Reserve and thus would not be a CBDC. Nor, he said, would it involve any sort of blockchain, distributed ledger or other intermediated account.

"Instead, it would be purely peer-to-peer, capable of offline transactions, and able to be held and used completely anonymously, like physical cash is today," explained Grey.

Grey said that while the Federal Reserve likes to say it's the agency responsible for managing US currency, other US Treasury bureaus like the US Mint, the Bureau of Engraving and Printing, and the Bureau of the Fiscal Service, as well as the US Postal Service have historically overseen public monetary technologies.

"There's always been a division of labor," he said.

A tall order

As described in the draft bill seen by The Register, e-cash must be "capable of being owned, held, and used directly by the general public via widely available hardware devices, without the necessary involvement of third-party custodial or payment processing intermediaries." The bill, which does not appear to have bipartisan support, needs to make it through the House and the Senate before it is law.

One of the primary advantages of e-cash would be that it can be spent and received without any transaction fees, just like retail transactions involving US dollars.

What's more, e-cash promises a way to avoid the financial surveillance that has taken root around credit-based transactions. The bill requires "any hardware device authorized to hold or otherwise facilitate transactions involving e-cash shall be secured locally via cryptographic encryption and other appropriate technologies, and shall not contain or be subject to any surveillance, personal identification or transactional data-gathering, or censorship-enabling backdoor features."

Grey said there's a legal difference between account-based money and cash. Account-based money is subject to the third-party doctrine in privacy law, he explained, and since US v. Miller (1976), the rule has been that if you share information with a third-party like a bank, you lose the expectation of privacy. Thus, banks will inform authorities about transactions per reporting requirements.

Cash isn't covered by the third-party doctrine and Grey said the goal with e-cash should be to provide the same characteristics.

"We don't require people to have an ID for cash," said Grey. "Why should we require them to have an ID for digital cash?"

That's not to say e-cash would be unregulated. The bill requires that e-cash should be "classified and regulated in a manner similar to physical currency for the purposes of anti-money laundering, know-your-customer, counter-terrorism, and transaction reporting laws, and accordingly not subject to the third-party exemption to an otherwise presumptive expectation of privacy."

Grey acknowledged that companies currently in the business of mining financial data or collecting fees as transaction gatekeepers might want nothing to do with e-cash, just as they try to avoid dealing with hard currency.

"A lot of financial institutions hate cash precisely because it's a public service they're expected to support," he said. "More importantly, it's not just a money loser, it's a black hole for data gathering."

And that, Grey said, is the point of e-cash. ®