Protocol | Fintech

The digital dollar is coming. Here’s what payments companies worry about.

Jodie Kelley heads the Electronic Transactions Association. The trade group's members, who process $7 trillion a year in payments, want a say in the digital currency.

Jodie Kelley is CEO of the Electronic Transactions Association

Jodie Kelley is CEO of the Electronic Transactions Association.

Photo: Electronic Transactions Association

The Electronic Transactions Association launched in 1990 just as new technologies, led by the World Wide Web, began upending the world of commerce and finance.

The disruption hasn't stopped.

Now in its fourth decade, the ETA, which represents more than 500 corporations, including giants like Wells Fargo, Visa, Mastercard, Capital One and Google, is grappling with the most dramatic technological shift in payments: the rise of cryptocurrencies and other digital means of exchange.

The ETA is gearing up for deeper discussions over the creation of a central bank digital currency, or CBDC. There's been growing excitement and concern around an American CBDC — the digital dollar — ever since Federal Reserve Chairman Jerome Powell designated it as a "high-priority project."

How should a digital dollar be issued? How should transactions work? How would it affect the business world? These are key questions for the ETA, said CEO Jodie Kelley. "We are engaged in the conversation, which is picking up significantly, but are still in pretty early stages," she said.

In an interview with Protocol, Kelley, who assumed the post in 2019, talked about how the association — whose members collectively process more than $7 trillion in purchases in North America — see the rise of crypto and how they are gearing up for what could be a major shift in their industry.

This interview has been lightly edited for clarity.

What has been the attitude toward crypto among your members?

There is a broad recognition that crypto writ large is here to stay. People are interested. They're engaged with it, and our member companies are as well. There's clearly a range of different views about how certain forms of crypto will ultimately shake out. To date, for example with bitcoin, we've seen consumers engaging with it more as a new asset class, something that they buy and hold and hope it continues to go up.

You see our member companies facilitating that purchase, the holding, the ability to sell it. And you see our member companies who continue to take the public position that cryptocurrencies like bitcoin could serve as a payment mechanism. To date, it hasn't proven out, mostly because of the incredible volatility. But we definitely have member companies who are exploring it.

There's a debate on whether to view crypto coins as currencies or securities.

Yeah, there is that debate about currency versus security. As you look at how bitcoin and those types of cryptocurrencies have evolved, consumers are engaging with them more as a security than as a payment mechanism.

What do you think of the U.S. looking to launch a digital currency as a response to the rise of bitcoin and other currencies?

You're putting your finger on what is the most important question with respect to central bank digital currencies: What is the problem that we're trying to solve for, and is the CBDC the best way to do it?

Early on, there were people who said if coins like Libra take off, that could be a threat, and so CBDC is a response. Now you hear CBDC talk much more as a hedge against what China and others are doing with their digital currencies, as a way to reach low- and moderate-income Americans, as a way to solve cross-border challenges. There's a whole host of problems.

The payments industry is a technology industry. This is premised on a new technology that I think a lot of folks, including our members, find really exciting. I think the excitement is somewhat tempered though by the fact that the introduction of a CBDC is pretty complicated.

There are some risks, as Chairman Powell and others have called out publicly, depending on how you do it. There's a sense of caution, of being excited to support it, but wanting to make sure that whatever is done is done correctly and in a way that does no harm.

What are some of the risks that have been raised by ETA members?

One risk that has been pretty widely discussed is the risk to the lending system in the United States.

If there's a flight of deposits out of banks and into some CBDC wallet, for example, then banks, which rely on those deposits to then lend and create commercial money, that ability would shrink. So the ability of individuals and small businesses in our system to get loans would be diminished.

That would be an unintended consequence. There's not a desire going into this to make it harder for people to access capital when they need it. Different central banks have talked about all different ways they may try to mitigate that risk, but it's clearly a risk that is acknowledged pretty broadly.

There are a lot of questions in terms of design choice. We have an existing system now that is highly secure. If you're building a new system, what security gets built in? What interoperability gets built in? What is the balance between privacy and a regulatory regime like anti-money laundering? There are many, many questions like that that arise.

Can you elaborate on the privacy and anti-money laundering concerns?

When you think about the rise of crypto, there was a real desire to lean into the privacy component, to have a means of transacting where privacy was at a premium. Obviously, when you choose that as a first principle, if it truly is a private system that's not trackable and traceable, then you're giving up the ability to track it, when there are concerns about legality. Anti-money laundering, know your customer, the full regulatory regime that's designed to ensure that people are who they say they are, that we can trace money when we think it's being used for illegal purposes — it is made much, much more difficult in an environment where the digital currency is essentially anonymous and it's not trackable.

If I hand a dollar to you, there's no record of that $1. It's one thing when you're talking about dollar bills because you can only carry around so many sacks of currency. But when you're talking about a digital dollar, that concern becomes amplified.

There are concerns when the swing to privacy goes the other way. People raise concerns about China's digital yuan, for example, whether at its core is a mechanism to track how its citizens are moving money.

Are there things that China or maybe other countries have done with CBDCs that your members find troubling, that made them say, "We should avoid this?"

I would say it's so early, notwithstanding China being out there testing the water. You know, there are so many central banks that are looking at this. Most of them, including our own, are just looking at it. Most of the discussion now is happening in the abstract. There's very little to react to thus far.

What's the biggest worry of your members?

The concern at this early stage is just ensuring that there's a recognition of the complexity here. There's this recent paper published that referenced the Hippocratic oath in this context: "First do no harm." It's hard to get concrete about the harm until you understand what the proposal is.

There have been recent major developments in the crypto space. Clearly, the industry is growing faster, highlighted by the Coinbase IPO. But there are also concerns about volatility and the use of crypto in criminal activity. How have your members reacted to these?

There's a lot going on. There's a recognition that cryptocurrencies are here to stay. The volume is significant. This is real. You're seeing the industry engaging with it in different countries in a way that maintains the integrity of the system. As you mentioned, you can't open your computer without seeing something about crypto.

This is the flip side of my earlier question. Are there CBDC features or policies that your members find exciting and promising?

What I'm hearing more right now is interest in some broader cooperation internationally on CBDCs. One of the use cases that people have talked about are cross-border transactions, which is challenging for settlements and remittances.

There's a recognition that CBDCs would have to solve a bunch of other things, including interoperability. You must have a mechanism to settle in whichever CBDC you're going to settle in. There has to be interoperability. You've got to be able to go into a drugstore and use the CBDC to buy something. There has to be a mechanism for them to go through some network to settle.

And the complicating factor is you have more than one government, more than one CBDC, so they have to be able to interoperate for them to take advantage of the technology.

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