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  • Adam Yarnold

The Future of Money

Updated: Nov 27, 2022

Hey everybody – this post is about an under-the-radar project that kicked off a week ago. It’s worth everyone in finance keeping their eye on this – it very well could be the future of money in the US.


It’s a test run of a digital dollar. A digital dollar is a software upgrade to the US’s financial infrastructure. It will enable the movement of money in a way that is faster and cheaper than today. It will also be programmable, which means that financial applications can integrate with it easily and securely. A digital dollar would be a huge upgrade to our existing financial infrastructure, which runs on 50-year-old technology and processes. We may not see how dated our legacy infrastructure is because of cool interfaces like Apple Pay or Venmo (until you have to send a wire), but it costs us upwards of 100bln/yr in payments to intermediaries. The cost and inefficiency also unfortunately prohibit people from accessing our banking system. Lower cost = more financial inclusivity.


Called RLN, the program uses distributed ledger technology (DLT) to transfer bank balances between participants. The parties involved in this pilot are the Federal Reserve, 12 large banks, Mastercard, and two technology companies. If it’s successful, it should reduce the costs of goods and services in the US, facilitate capital market settlements like instantaneous stock settlement, increase trade between the US and other countries, and most importantly, help keep the US Dollar as the global reserve currency. Big stakes, right?

The project also answers a lot of questions about the future of the banking industry and privacy rights as we move further toward a digital economy. The design of a digital dollar has a critical decision point: will we have accounts at the Federal Reserve, or will we have accounts at our banks? The first option, which people call a “Retail” model, means that the government can instantaneously transfer money to your account (or out of it), and see all economic activity in the US (and all of your economic activity). The second model, called the “Wholesale” model, works like our existing system. You have an account at the bank and it just works better/faster/cheaper.


There are some advocates for the retail model because of the reduction in fraud and waste (tax refund fraud, ability to send direct payments to people instantaneously, etc.). The downside of the retail model is that the government can see exactly what you are spending money on – in China, this is the way it works, and it’s tied in with the social credit system. The Wholesale model keeps the government out of your financial business and keeps the 10,000 U.S. financial institutions alive, and the people who work there employed. It also preserves our existing system of multiple tiers of money.


As far as timing and what needs to happen for this to go live – things move slowly when the government is involved. We are realistically a few years out from this being implemented. With that said, the US is nowhere in terms of world leadership for digital currency. China launched the digital yuan and has already recorded hundreds of millions of transactions, and is pushing usage in Africa and Asia. 86 other countries are working on their version of a digital currency. These competitive pressures, combined with the U.S.’s existential need to maintain reserve currency status, are likely to push the government into action. Regarding what banks and payment companies will need to use this system – banks will need a way to connect to the RLN and synchronize their own “core” systems (their internal ledgers of liabilities and assets). (Full disclaimer – my company, Fin3 Technologies, does this)


Want to compare notes? Please reach out to adam.yarnold@fin3.tech. Thanks for reading!


Regulated Liability Network: This term for a wholesale digital dollar system was created by Tony McLaughlin in his whitepaper, “The Regulated Internet of Value”. The whitepaper can be found at https://regulatedliabilitynetwork.org/. In the paper, Tony proposes a framework for how to move money around over DLT. The project puts Tony's idea into practice. The term “Liability” is a little confusing to people who aren’t bankers, but it’s there because your money in the bank, a deposit, has an accounting classification as a liability (because the bank has to pay it to you when you ask for it). There are bank assets, which are money held on reserve at the Fed, or loans that the bank has made. Both these liabilities and assets move around on DLT, but the official name just has liability in it – just think about it as a way to move bank balances.


Distributed Ledger Technology: DLT is also known as blockchain but doesn’t have anything to do with the “crypto” that most people are familiar with (for better or worse). DLT is a combination of two technologies – distributed computing and cryptography. In plain English, it’s a way for a bunch of different computers to securely interact and keep records of transactions. The transactions the computers are executing and keeping records of are transfers of digital dollars between participants. The records are always correct, they’re secure, and they are programmable. The specific type of DLT used in this pilot program is developed by SETL and Digital Asset (f.k.a Digital Asset Holdings). They have done an impressive job of building infrastructure that can handle the massive throughput required for payments. You can learn more at https://setl.io/the-regulated-liability-network-rln-whitepaper-on-scalability-and-performance/, https://www.digitalasset.com/developers?utm_source=google&utm_medium=paid_search&gclid=EAIaIQobChMIs_HHuNXM-wIVaEpyCh1baA6XEAAYAiAAEgIrZ_D_BwE. Or, if you're a bank, talk to us.


What is a digital dollar? Think about it as a huge software and hardware upgrade for our financial system. It’s the technology that will make payments and settlements fast, cheap, seamless, and importantly, programmable. It would be a major upgrade to our existing financial infrastructure, which is 50+ years old, manual, and bolted together with processes, people, and paperwork. Digital versions of currency are also called Central Bank Digital Currencies. The link to the Fed's (actually, the NY Fed's) description of the program is here: https://www.newyorkfed.org/aboutthefed/nyic/facilitating-wholesale-digital-asset-settlement


Global Reserve Currency: Moving to a digital dollar is very important for the US from a geopolitical standpoint. The US Dollar is the global reserve currency - most other countries hold dollar assets as their reserves (60+%) and most trade is conducted in dollars (at least ½ of the leg of each international trade is denominated in dollars). If some other currency became the global reserve, the US would have to balance its budget (imagine cutting 2 trillion in spending!). This enables our country to run massive deficits while importing way more goods than we export. The USD is the global reserve currency because of our country’s military prowess, the fact that we operate under the rule of law, we have a stable government, and a lack of alternatives This reserve status is called “exorbitant privilege” and other countries want it, namely China. China launched a digital version of its currency earlier this year and is using this digital yuan to get other countries to adopt the yuan for trade versus the dollar.


Financial Incentives/Cost of our existing infrastructure: There’s also a significant financial incentive to having a digital currency. Our existing system requires intermediaries to move money around, which makes it slow and expensive. Take, for example, how you send money to a different country, shown in the diagram below.



You need three banks, multiple payment messages, and multiple accounting transactions. Some or all of these are done on paper and require humans to sort out what happened, and as you’d expect, everybody involved requires some type of payment.


A digital currency makes this easy, fast, and cheap. It makes lending and payments easy, also, reducing the friction in sending money and goods around.


There are two types of money in the US. There is “central bank money” and there is “regular money” (or “commercial bank money”). You and I are used to regular money. Regular money is a check, an ACH transfer from our bank accounts, a debit card transaction, or a credit card transaction. I can send you money with Venmo, or Zelle, give you cash or charge a credit or debit card through a payment processing terminal that you have. First, I need to have deposited money at my bank. That happens by my employer setting up a direct deposit or by me taking cash to the bank to deposit. Either way, when I send money to you, it comes out of my bank account and goes to your bank account. You can then withdraw it from the ATM, send it to your electric company, send it to DoorDash by way of your Visa card, etc. That’s regular money. There’s another subtype of regular money called “e-money”, but not worth getting into here.


But there’s a different type of money - central bank money. This is money that your bank deposits with the Federal Reserve. That money sits at the Federal Reserve and can move between the Fed and your bank. When I deposit $100 at my bank, or my employer deposits my paycheck at my bank, the bank sends some of that money to the Federal Reserve. Cash is an interesting hybrid - h/t to Anders Olofsson for pointing this out - it's technically central bank money, but it converts to regular money once deposited at a bank.


Why does this setup exist? It makes our economy work. Banks take in your direct deposit for your paycheck, and then lend that money (actually more than that money) out to someone else for a mortgage loan or to Il Mattone pizzeria (awesome pizza btw) to buy new equipment, etc. But by keeping some money in reserve at the Fed, and along with an insurance program from another part of the US government, this system means that banks can and will lend money into the economy, which enables people to start businesses, pay other people, and buy stuff on credit. Without it, you’d just have a bunch of people with dollar bills under their mattresses and economic activity would be next to zero. This is called fractional reserve banking. Disclaimer: I’m glossing over a lot in this article – my goal here is to pick out the important topics and focus on them, and that comes at the expense of detail. You’ll also notice that I’m deliberately not pedantic about terminology – the concept is what matters.

How we move different types of money. For regular money, you can send a check (25% of business payments are made by physical check), you can give someone cash, you can send an online check, you can use a new service like Zelle or Venmo, or you can use a debit or credit card. The online check runs on a system called “ACH”, which dates back to the 1960s, and is a technology that lets banks record transfers to and from each other. (for posterity’s sake, there are different types of ACH networks, including one run by the Fed. Skipping the details here). As you’d expect from a 50+-year-old system, the technology is just a little out of date and requires a high degree of human intervention. The words “auto bill pay” send a shiver down most people’s spines. Setting up my utility bill had a four-week delay. However, 58 trillion USD moves via ACH per year. Zelle and Venmo are a little better, given they’re much newer, but they’re controlled by private parties and charge their fees and restrict access. Debit and credit cards are private networks owned by companies like Visa, Mastercard, and American Express. Credit cards are a part of our lives, but they’re expensive. Visa made 29 billion dollars last year – that comes out of the pocket of consumers one way or the other (we’ve all seen the signs at your local restaurant about a 4% credit card fee markup).


Central bank money moves between the bank and the Fed. One interesting nuance is wire transfers. When we send a wire transfer, what’s happening in our bank tells the Fed to decrease its reserves by the amount of the wire, and then the reserves of the bank associated with the wire recipient receive an increase in reserves. And with wire transfers, how many of us have thought it’s crazy that you need to fill out a paper form with a bunch of financial info, that someone then reads and types into another computer to send money? I have a supercomputer in my pocket – why am I writing on paper with important financial information?


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