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Proposed Pathway for US Digital Dollar

Research · May 2022

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Harvard FinTech Online short course
Name: Dr. Jayesh Mehta, MBA
The Road to U.S. Digital Dollar
An Integrated Cross Border Payment Solution

???
FEDNOW
Federal Digital
System 2023

???
Possible First Step
By Feds to issue
US CBDC Aug. 2021
 AGENDA

• Introduction, Problem Statement, and Proposed Solution,

• Background and Cross Border Transfer Terminology
➢ Fundamental Difference Between FIAT and Digital Transactions
➢ The current Cross Border Transfer Infrastructure – Proposed Solution
➢ Digital Dollar Evolution and Why Digital Dollar?
➢ Salient Features of a Digital Dollar,
➢ What is a Block chain?
➢ Basics of XLM and XRP Block chains
➢ AI and Machine Language Terminologies,
• The Proposed Integrated Solution
• Concluding Remarks
 Fundamental Difference Between FIAT and Digital Transactions

FIAT Transaction
Digital Tokenized Transaction
 Cross Border Transactions, Shortcomings.
Proposed Solution

• The Fiat transaction process shown in the previous slide is cumbersome, and prone to
Fraud, tempering, and human errors.
• It also bears the Currency fluctuation risk as the process often takes weeks to complete.
• Significantly expensive to the consumer, about $50 to$100 per transaction
• AML guidelines have strengthened the KYC laws making it more difficult for
Small businesses and individuals to get required efficient service.

Proposed Solution:
Develop a Block chain, AI, ML, and FX based integrated platform that provides immutability,
Security, zero exchange rate risks, and ability to hedge against currency fluctuations through
Smart contracts.
 Why Digital Dollar – Currency?

• The digital 21st century is underserved by an analog reserve currency; a

Block chain, AI,
and Machine language digital dollar would help future-proof the greenback and allow individuals
integration - 2024 and global enterprises to make payments in dollars irrespective of space
and time. (Chris Giancarlo, Digital Dollar Project)
FEDNOW
Federal Digital • Blockchain technology is sufficiently matured to address needs of a
System 2023 FIAT currency in the digital format. In addition, AI, and Machine
??? language are evolving rapidly. FX trading platforms are NOW AI and
somewhat Machine language compatible.
• Smart phone and internet based Global and National trade have
expanded significantly – to the tune of a Trillion dollars in 2020
(https://www.researchgate.net/publication/338966092_Impact_of_Mobil
e_Phone_on_International_Trade).
• Two Blockchain based protocols, Ripple (XRP), and Stellar Lumens
First Step (XLM) are gaining popularity as the coins of choice for many an
By Feds - US CBDC
International businesses.
Aug. 2021

It seems that a Digital Dollar will provide a missing front end to facilitate
international trade robustly, less expensively, and safely.
 What is a Digital Dollar? What Are the Salient Features?
• Digital dollar is FED sanctioned FIAT currency that is backed by the US Government.
• It will be mined digitally by the FEDS and put into the circulation – just like FIAT US currency.
• It will have the same features such that banks will be able to perform overnight depository with
the Central bank, earn interest, and carry out overnight interbank lending,
• The overnight FED rate will be determined exactly the same way as now – though conceivably
it will be lower due to lower minting, operating, and operational costs,
• It will maintain the same parity with International currency, and FX rates will be determined by the same supply and
demand laws as the FIAT currency.
• Initially, for some time FIAT and digital dollar will be in circulation with digital dollar maintaining constant parity with
FIAT currency, e.g., GEMINI dollar, US Dollar Tether (USDT), and others.
• FEDS will maintain sufficient supply of Digital Dollar – should there be a run-on digital currency due to fraud, sovereign
instability, or international conflicts.
Thus, Digital Dollar will perform the same functions as FIAT currency, but it will be more compatible with other Digital
platforms, like Block chain, AI, Machine language, and digital FX platforms
 What is a Block Chain?

• Block chain, where each transaction is verified, recorded,

and is immutable.

• The transaction can not be altered, added to or removed

anywhere along the processes (1), through (5).

• Ready for the receiver to access the transaction using his

private key and sender’s public key

Salient Features of a Blockchain:

➢ Blockchain is a dynamic ledger (list) of records (Blocks), irrevocably linked using cryptography.
Each block contains a cryptographic hash of the previous block, a time stamp, and new transaction
data.
➢ Open and distributed ledger that is verifiable, immutable, typically managed by thousands of peer-
to-peer computers. Validation of a new record in the chain involves solving a complex mathematical
protocol, and as a result data once recorded can not be altered. Recorded data (The hash function),
is transparent and hence it offers unparalleled security.
 Basics of XLM and XRP Block chains

Stellar (XLM) Block chain

Stellar and the attendant native crypto currency Lumens (XLM) are interesting concepts. In
simplest terms, XLM is a Global currency like Currency Without Borders that can be redeemed in any fiat
currency of your choice, lest that be dollars, British pounds, Bitcoins, or Indian Rupees. In fact, according
to Stellar communication (Anonymous, https://www.stellar.org/learn/intro-to-stellar), it has no owner, if
anything it is owned by the public. The software runs across a decentralized, open network and handles
millions of transactions each day. Like Bitcoin and Ethereum, Stellar relies on blockchain to keep the
network in sync, but the end-user experience is more like cash—Stellar is much faster, cheaper, and more
energy-efficient than typical blockchain-based systems.
The Ripple (XRP) Block chain
Ripple Protocol is able to process secure and reliable transactions in a matter of seconds: the
length of time required for one round of consensus to complete. These transactions are provably secure up
to the predetermined bounds. (Ripple White paper, Ripple Labs, 2014). Admittedly, due to its Protocol
Consensus Algorithm it is superfast and is more amenable to transfer payments than Bitcoin.
 Block Chain Based Digital Currency Flow Path

A Simple Block Chain Based Cross Border Digital

Currency Transaction – using XRP or XLM
 AI and Machine Learning Technologies

• ‘Homo Deus’ author Yuval Noah Harari says ‘(Decision making) Authority to shift from Humans to AI in this
century (https://www.ynharari.com/book/homo-deus/)’ ,
➢ Convergence of IoT (Internet of Things), AI, and Blockchain is still an idea though finding applications in
cars, industrial operations, health care, industry supply chain, Big Pharma and in FINTECH solutions
(https://www.frontiersin.org/articles/10.3389/fbloc.2020.522600/full).
➢ Deep learning or Machine learning branded as AI without limits is finding multiple applications from
space to medicine to high powered pharmaceutical applications.
• Computer driven FX trading is almost a must in the current environment, when currency price fluctuations are
highly volatile and controlled by numerous factors including 24/7 news cycle that can disseminate information
at the click of a mouse.

Thus, a convergence of all of these or some in Cross Border Transactions is the most logical next step In
advancing P2P, B2B or C2C Cross Border payment system. Such a system would be transparent,
immutable, and devoid of human initiated fraud or mistakes.

Process Steps for the Sender
(1). The sender initiates the transaction
in FIAT currency , receives the private
key and gives it to the receiver.
(2). Decides immediate conversion or
future date conversion and gives
instructions to ML driven FX platform
The result is an Automated process that creates Immutable fund transfer chain that is devoid
of mistakes and is not subject to human error
A Road Mao To Digital Dollar
ML controlled FX interface
Process Steps for the Receiver
(1). The ML driven FX interface coverts
FIAT to XRP or XLM depending upon
instructions (1). Receiver uses the private key given
(2). ML controlled Smart Contract by the sender and receives funds in
executes the instructions XRP or XLM tokens
(3). Sends Crypto to receiver (2). Receiver again converts Crypto to
her choice of FIAT currency
Immutability, verification implemented
instantaneously or at a future date.
through XRP Block chain. Execution
Future date execution to be controlled
controlled by ML implemented smart
by ML driven smart contract.
contract.
 Salutary Aspects and Shortcomings
Advantages:

• The proposed solution leverages practically ALL the technical features of Blockchain, ML, AI, and FX trading,
• It offers an immutable, transparent, and fraud proof mechanism for cross-border Fund transfer,
• It is not subject to volatility in FX markets. The transfer could be instantaneous or at a future date, and it is
controlled by the sender and receiver,
• Political instability, IMF intervention (say, in Asian Contagion times), or a sudden withdrawal of notes by a
sovereign entity (say, in India – removal of Rs. 1000 and Rs. 500 notes) do not affect the transaction,
• The ML and smart contract features allow development of FX hedging schemes to the benefit of the sender or
a receiver.

Shortcomings:

• Initial capital layout to develop the proposed infrastructure may be high,

• Many may not be conversant with these technologies, so adaptation may be difficult,
• Government sanctions and intervention can disrupt the complete process chain. For example, XRP is still
being Investigated by SEC.

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