Introduction

The U.S. Patent and Trademark Office (USPTO) has recently published that Visa (V) has filed a patent application for a digital fiat currency. The application mentions Ethereum (ETH-USD) several times, suggesting that the Ethereum blockchain could be the one used for the project. Should the project go through, its implications are significant for both parties.

Source

The patent describes techniques for the generation of a digital currency and the subsequent removal of the physical currency from circulation in the standard fiat (government-issued) currency system. The application abstract states:

Techniques are disclosed which include receiving, by a central entity computer, a request for digital currency. The request includes a serial number and a denomination of a physical currency. The central entity computer generates the digital currency for the denomination and linked to the serial number. The generating includes recording the digital currency on a blockchain. The central entity computer transmits a notification of the generation of the digital currency. The central entity computer causes removal of the physical currency from circulation in a fiat currency system."

The patent refers to the generic term "digital fiat currency". It can be assumed that its first application will be to the US dollar, but other international currencies could soon follow.

Figure 1 - Process Architecture - Source

The whole process will be recorded on a blockchain. For those who are not familiar with the technology, a blockchain is decentralized, distributed ledger that records the provenance and exchange of digital assets through a transparent and secure process. In its first application, bitcoin (BTC-USD), blockchain technology allowed to perform financial transactions without relying on a central trusted third party. Removing the need for a centralised third party has been shown to, ultimately, improve efficiency, security, and reliability processes. In this specific application, it would solve the need of creating an immutable record of transactions while achieving efficiencies and cost-saving on several aspects.

Significant cost reduction is achievable through the adoption of the technology. Reconciliation expenses are the first thing to consider. "In accounting, reconciliation is the process of ensuring that two sets of records are in agreement. Reconciliation is used to ensure that the money leaving an account matches the actual money spent. This is done by making sure the balances match at the end of a particular accounting period."

Across almost all financial services, reconciliation is an expensive and time-consuming process. The lack of transaction transparency and inefficient information sharing across organisations lead to delays and extra expenses. Examples of this can be found in the workflows of trade settlement and trade finance, cross-border and domestic payments, credit letters settlement, and many more. Using blockchain, the time and cost of these reconciliation efforts could be drastically reduced since all parties get instant visibility of transaction and information, maintaining high security and immutability of records.

Audit costs could also be reduced since each transaction is recorded sequentially and indefinitely, providing an audit trail for all assets and transactions that have been successfully executed.

Other examples include information sharing between parties, such as KYC (Know-Your-Customer) and AML (Anti-Money-Laundering) data, an all kinds of workflows automation, such as using smart contracts for accounts payable/receivable and data validation.

In this particular application, Visa aims at receiving physical fiat currency and replace it into the system with digital currency recorded on a blockchain. Therefore, this would slowly absorb physical currency from the current system, potentially achieving a gradual shift to a cashless society. For Visa, dealing with digital currencies will provide a frictionless environment that will significantly increase efficiency and allow it to achieve all the above-mentioned cost-saving benefits.

The blockchain use by the project could be the Ethereum blockchain, as it is mentioned several times in the patent application, such as:

In some embodiments, Ethereum may be used to implement various aspects described herein.

In some embodiments, digital fiat currency may be implemented using Ethereum as illustrated in FIGS. 9A-9D."

The Ethereum blockchain seems, therefore, a valid candidate for the project. If you are not aware of the Ethereum network or you want to know more about it, I highly suggest you read my previous article, "The Present and Future of The Ethereum Network". Currently, due to scalability issues, such a high volume of transactions is probably not feasible on Ethereum or any other pure decentralised blockchain network. However, scalability is set to improve significantly due to the series of updates known as Ethereum 2.0. Developers are also working on other solutions to improve Ethereum scalability, such as Matic, a sidechain scaling solution that is now live on the Ethereum main-net. As an alternative, Visa could decide to settle with a centralised, less-secure second layer on top of the Ethereum blockchain, with only periodic synchronisations with the Ethereum main-net.

The filing of a patent application does not necessarily mean they have any intention of actually rolling it out. Competitors could be working on the same lines, and patenting the technology could be a way to kill the competition.

However, I believe this specific patent has huge potential since it is tied with the figure of a central authority or central bank. The patent states that these central authorities could be entities "responsible for the production and distribution of money and credit in a region (e.g., a nation)" and would have "exclusive permission to transform physical currency into digital currency in order to regulate the value of the digital currency". To ensure that this digital coin value is stabilized, for every time a dollar worth of digital fiat currency is generated, the central entity ensures that a corresponding physical dollar bill is removed from circulation, in order to regulate the value of the digital fiat currency.

This central entity would have control of the timing and quantity of the digital currency issuance and would manage "the destruction of units of physical currency in connection with the generation of corresponding units of digital fiat currency". To me, this seems like the only way in which the government could complete the switch to a cashless society in the never-so-near future completely digital world. It would be no surprise since many governments are embracing digital currencies. China already stated to be close to the release of its own digital currency, Singapore is testing blockchain digital currency system for banks, while Ghana is about to start testing an actual central bank digital currency, with Deputy Governor Maxwell Opoku-Afari stating:

Individuals, businesses, and government have shown a strong preference for digital payments for reasons of convenience, efficiency, speed, affordability, round the clock availability and robust audit trail."

Recently, Americans got an exposure to the idea of a sovereign digital currency when a digital dollar bill was included in the proposed solutions for distributing federal handouts during the COVID-19 crisis. While this proposal was eventually left by the wayside, on June 11th, the US congress devoted an entire hearing to the subject, demonstrating that the idea is now closer than ever to becoming reality.

Should the government go ahead with the transition, Visa could find itself in a very strong position, having patented the most straightforward system to do exactly what the government would be needing to do. In that case, the government would not be seen as a patent "infringer" but it would probably agree to offer compensation for the use of someone else's patent. In any way, Visa could have just cemented its position as the main government partner in the shift to monetary digitalisation that is bound to happen in the future.

I rate VISA a strong BUY.

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Disclosure: I am/we are long V, ETH-USD, BTC-USD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am not a financial advisor. All articles are my opinion - they are not suggestions to buy or sell any securities. Perform your own due diligence and consult a financial professional before investing or trading.

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Visa And The Digital Dollar On Ethereum - Seeking Alpha