Breaking down the proposed cryptodollar

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Around the same time a sorely needed economic relief package made its way through Congress into law to try to offset the economic wreckage of COVID-19, a unique proposal came to light a few weeks ago. While it soon faded from the headlines and from most discussions as attention turned to implementing the economic relief bill itself, the potential for a cryptographically secured digital U.S. dollar is still worth discussing.

Much has been written and discussed over the last several years as decentralized cryptocurrencies, stablecoins and smart contracts continue to move closer to mainstream economic debates. Even with all of this conversation, however, the idea of a governmentally managed and issued cryptoasset seems worth digging into further. Let’s take a look at what a potential cryptodollar might look like, some of the opportunities it might create, and the implementation challenges that need to be addressed.

But first, not so different

With all of the buzz this announcement created, it’s easy to imagine that the idea of a virtual currency is something new, but that’s simply not the case. Moving to a cashless society is something that has been underway both in the United States and abroad for decades, with some nations actively pursuing a goal to have all personal and commercial transactions become digital in nature. Venmo, Zelle and numerous other cash transaction apps have already gotten millions of Americans used to conducting transactions in a digital manner and are reliant on some level of security. Although the idea of a cryptodollar might have generated a lot of sizzle, it is not as dramatic a departure as it might appear. That said, a cryptodollar would be significantly different from existing fiat currencies, cryptocurrencies and stablecoin offerings.

Nevertheless, the idea of a government-issued cryptodollar would be radical, given the roots of bitcoin, the most known and discussed cryptocurrency. As outlined in the original bitcoin whitepaper, and cited by proponents and critics alike, a major (some would say primary) driver of crypto development was to create a legitimate alternative to fiat — government controlled — currencies. After a dramatic run-up in 2017 led to a crypto price crash, the trend has been toward increased centralization as traditional institutions became involved in the blockchain space. The pros and cons of this shift have been debated endlessly, but the fact remains that this shift has occurred and continues to move forward. Punctuated by the somewhat surprising launch and presentation of the Libra Association in June of 2019, the idea of a centrally developed, issued and controlled cryptoasset was — suddenly — not as wild or unrealistic as it previously had been. The pushback that this announcement generated nearly overnight on a global basis proved one thing without a doubt: governments were taking this idea seriously.

Benefits and opportunities

From an accountant or practitioner perspective, there are two potential primary benefits associated with a potential cryptodollar project, both of which address two large stumbling blocks to broader adoption. Kicking it off would be the potential resolution of accounting and reporting issues that can complicate providing advice to clients. Since this specific cryptoasset is a cryptodollar, and would be backed by the full faith and credit of the U.S. government, it would be simple to say these cryptodollars should be accounted for as cash equivalents. While this assumes any technical issues (more on those next) will be resolved, this would address some of the questions troubling practitioners. Building on this first resolution, the next logical item that would potentially be addressed is the current debate regarding tax treatment of cryptocurrency.

Currently cryptoassets — including traditional cryptocurrencies like bitcoin and stablecoins — generate a taxable event and tax liability when they are used or are received for goods and services. Since this proposed cryptodollar would be equivalent to the U.S. dollar and treated as such from a reporting perspective, it also makes sense that it would be treated as such for tax purposes. In other words, the accounting and tax issues, both of which have been substantial obstacles to broader adoption, could potentially be addressed via the introduction of a cryptodollar.

Potential stumbling blocks

Despite these benefits of a proposed cryptodollar, several significant issues could derail this otherwise interesting project. Setting aside the technical and implementation issues, and assuming this project will develop and roll out according to plan, let’s take a look at a few of the bigger-picture considerations that need to be resolved prior to broader adoption. (This is not meant to be an all-inclusive listing, but a starting point for further conversation and debate.)

1. Privacy: If a cryptodollar is issued and controlled by the Federal Reserve, what are the implications for privacy? Will the Fed then have access to every individual American bank account information, and if so, what level of control will it be able to exercise? Also, if every transaction is cleared through a Fed clearinghouse, does that subject all transactions to review and possible approval? If so, who decides what is an appropriate use of the cryptodollar?

2. The unbanked population: It’s no secret that issues of inequality in the U.S. and globally have moved to the front burner. Simply assuming that every American would have access to a mobile device to transact with cryptodollars would be naïve. The recent and sudden shift to working from home for large parts of the population has highlighted the bifurcation that exists between individuals with access to tools to exist and succeed in a digital environment and those who do not. How would this tool be rolled out to individuals who are unbanked or underbanked?

3. Connection to physical dollars: It would be unrealistic to expect any cryptodollar project to immediately succeed and seamlessly replace all physical dollars. If this project is implemented in stages, what happens to the value of physical U.S. currency? As the percentage of crypto to traditional dollars tilts in favor of cryptodollars, will this impact the comparative value of physical dollars? This might seem like a bizarre scenario, but how much is a VHS collection worth today compared to access to video-streaming services? Technological disruption always produces winners and losers, and the rollout of various governmentally supported cryptoassets would be no different.

It’s not clear the cryptodollar concept will proceed at this point, but the issue arose during the debate around the historic economic relief plan, indicating such a plan is being taken more seriously. Accounting practitioners and other financial professionals will need to keep an eye on this and other crypto developments, as governmental entities continue to become larger players in the space. Changes as dramatic as this will create both opportunities and challenges, but that is something the profession is used to contending with successfully.

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