Jonathan Dharmapalan realised digital currencies were the future a year after Satoshi Nakamoto published a white paper on the concept of bitcoin (BTC-USD).
The entrepreneur, an electrical engineer, saw a boom in electronic money companies as people learned to use apps and mobile phones to transact. He thought about how governments around the world might want to create their own digital currencies.
Dharmapalan is the CEO of eCurrency, a company pioneering the development of a central bank digital currency (CBDB), the next frontier in cryptocurrency. His firm has advised the US Treasury and Federal Reserve on how to create a CBDC for nearly a decade.
Dharmapalan advises central banks worldwide, including the Banks of England and Jamaica, which recently launched its own central bank digital currency.
Dharmapalan says designing a central bank digital currency depends on the existing legal framework, as the Federal Reserve weighs the pros and cons of a digital dollar.
“We believe currency is the law,” Dharmapalan told Yahoo Finance.
A fundamental law defines the currency of every nation or monetary union. So, if you’re considering a digital currency, the law must accommodate it,” he added.
According to his interpretation, if the US pursued a digital dollar, Congress would have to first authorise the Treasury and the Federal Reserve to issue it.
‘Make up new rules’
According to Dharmapalan, Treasury and the Fed have stated that a central bank digital currency would likely work in the same way as paper money, though the US government has yet to agree on how to implement it.
It is more likely than not that the current law will be extended to cover a digital dollar, so the existing infrastructure should be used.
“Could we devise new rules for digital currency? Maybe,” he said. “But it’s likely we’ll stick with past definitions,” he added.
The current currency system relies on banks – from Bank of America to local banks – to get cash into people’s hands.
Similarly, to circulate a digital dollar under the current system, Treasury would need to mint it securely before handing it over to the Fed. A digital ATM, card, or smartphone would then distribute it.
To be ubiquitous, digital currency must be accessible via ATMs, cards, smartphones, and other devices. Access to anyone is crucial.
President and CEO of eCurrency
Dharmapalan says a CBDC would function like a physical dollar, which has no ledger. The Treasury would create a cryptographically secured digital instrument that could float around digitally and contain value.
Dharmapalan suggests viewing it as a non-alterable photograph. “I don’t hold a photo if I send it to you,” he says.
A CBDC must protect Americans’ privacy. The currency is protected by a cryptogram, which is protected by multiple layers of cryptography, i.e. many public and private keys.
Duplicating it would be difficult, similar to copying paper bills. The physical currency has the signatures of the Treasury Secretary and the Comptroller of the Currency, as well as a reflective portion and a digital watermark.
“To be ubiquitous, digital currency must be accessible via ATMs, cards, smartphones, and other devices. Achieving this is crucial.
Dharmapalan suggested making inexpensive smart cards similar to transit cards accessible to everyone, from schoolchildren to those without bank accounts.
The card could have a magnetic strip or a smart chip and be inserted into a machine to load money. You could also put Bluetooth on the cards so people can bump cards and send money between them.
It must also be ubiquity and fungibility to instantly settle debts between two parties by executing and moving that value in a blink of an eye.
“My $5 bill needs to buy the same thing as your $5,” he says. “If you give me bananas and they’re $3.85, I should be able to give you $3.85 and walk away,” he added. Right now, only cash and coins work that way.”
Unlike private cryptocurrencies such as bitcoin, a US central bank digital currency would be issued and backed by the Fed.
Dharmapalan believes Jamaica is a good model for the US. The government is working on new legislation to allow its central bank to issue digital currency.
The Bank of Jamaica issued its first digital currency in August. To test new criteria by December, it will distribute the batch to commercial banks. The national roll out is expected in the first quarter of 2022.
Initially, Jamaica’s virtual currency will be accessible via a phone app and a digital wallet.
So how long until the US adopts a CBDC?
Dharmapalan stated that the technology is ready now, but Congress and government agencies need to agree on a plan. Officials at the Fed are split on whether to adopt a digital currency.
Advocates, including Fed Governor Lael Brainard, say a CBDC will speed up disaster relief payments and help the unbanked. With no firm policy recommendation in mind, the Fed plans to release a paper analysing the issue and seeking public input.