🧭 Digital USD Infrastructure – System Overview

This document outlines a replacement settlement infrastructure for the U.S. dollar. It provides a modern, programmable alternative to Fedwire and ACH using KYC-attested wallets and tokenized USD. It introduces staking-based liquidity management, automated compliance, and eventual support for additional currencies — all while preserving compatibility with existing financial institutions and policy.

I. 🌐 Core Protocol Architecture

1. Digital USD as the Base Settlement Layer

  • The Federal Reserve is the sole token authority for digital USD.
  • The U.S. Treasury sells bonds to the Fed and receives digital USD tokens in return.
  • All real reserves are token-based; there is no support for synthetic dollar creation at the protocol level.

2. KYC-Attested Wallets

  • All wallets must include a Know Your Customer (KYC) attestation issued by an approved identity attestor.
  • Attestations include metadata such as jurisdictional origin (e.g. country code).
  • This enables:
    • Regulatory compliance
    • Sanctions enforcement
    • Transparency for audits and reporting
  • Wallets are pseudo-anonymous: their identity is protected unless revealed by legal process.

3. Transaction Layer

  • Protocol-level API includes:
    • transfer(from, to, amount)
    • currency_swap(tokenA, tokenB)
    • get_attestation(wallet)
    • check_sanctions(from, to)
  • Application-layer developers are responsible for:
    • Recurring payments
    • Payroll processing
    • User-facing scheduling or batch logic

4. Public Transaction History

  • All token transfers are permanently auditable.
  • Enables third-party software to monitor for:
    • AML: Anti-Money Laundering triggers
    • SAR: Suspicious Activity Report conditions
    • CTR: Currency Transaction Report thresholds

III. 🏦 Banking & Transitional Design

See Transitional Lending Model

IV. 🪙 Monetary Policy Design

The system enables each token authority to define its own policy logic. However, Federal Reserve policy receives special handling to support transitional compatibility.

1. General Features

  • All currencies operate with real, token-based reserves.
  • The protocol itself has no built-in support for synthetic lending, money multiplication, or shadow issuance.

2. Yield & Liquidity Controls

  • Staking provides a mechanism for token velocity control.
  • The authority may mint yield to incentivize or disincentivize token retention or circulation.
  • This replaces interest rates, reserve ratios, and other indirect levers.

3. Fed-Specific Analogues

  • The Fed uses staking rates instead of Fed Funds Rate or IORB.
  • Digital USD tokens held by banks are actual reserves.
  • Interbank lending becomes a staking mechanism rather than an informal overnight repo system.

See monetary policy for more details

V. 📉 Taxation & Accounting

1. External Tax Handling

  • Tax compliance is not enforced by the protocol.
  • Capital gains, income classification, FX-like gains, and offsets are calculated by third-party tools.
  • Protocol provides full historical data to support audit and calculation.

2. Auditable Cost Basis

  • Public ledger allows tax software to:
    • Determine holding periods
    • Reconstruct cost basis
    • Calculate FIFO/LIFO scenarios
  • Protocol does not embed tax rules or cost basis metadata.

VI. 🧠 System Design Principles

1. Protocol-Level Neutrality

  • Core protocol handles:
    • Token movement
    • Currency swaps
    • Sanctions and compliance enforcement
  • UI/UX, banking apps, payroll tools, and internal ledgers are left to integrators.

2. Replacement of Legacy Infrastructure

  • Designed to fully replace Fedwire and ACH functionality.
  • Includes near-instant settlement, public auditability, and centralized compliance hooks.
  • Retains backward compatibility through bank-led synthetic systems during transition.

3. KYC and Pseudonymity

  • Wallets are pseudonymous to users and third parties.
  • Identities are only resolvable through the original KYC attestor via court order.

VII. 🏛️ Multi-Currency Expansion

This protocol is designed to support multiple currencies beyond digital USD, including both corporate and sovereign tokens. Each token is issued by a token authority responsible for supply and policy, while swap functionality and liquidity are provided by independent, fee-incentivized nodes.

1. Token Authorities

  • A token authority is responsible for minting and redeeming its own currency.
  • Authorities are not required to operate validator nodes or provide swap liquidity.
  • Examples include: the Federal Reserve (USD), Walmart (WMT), or third-party synthetic issuers.

2. Currency Swap Infrastructure

  • Swaps occur through token liquidity pools, each backed by real reserves in both tokens.
  • Pools are created by liquidity providers who deposit two-token pairs (e.g., WMT/SBX) into a swap contract.
  • Swap fees are distributed to pool providers proportional to usage.
  • There is no default routing through USD — direct pairs must exist to support a swap.
  • Swap quotes may fall back to multi-hop routes (e.g., WMT → XYZ → SBX) if liquidity paths exist, but routing is market-driven.
  • Token authorities may seed liquidity pools with reserves to bootstrap adoption.

🔄 Note: Swap liquidity is not provided by staking.

  • Staking: Locks tokens to slow monetary velocity and earn yield set by token authorities.
  • Liquidity Provisioning: Deposits tokens into swap pools to enable trades and earn variable swap fees.

These are separate mechanisms with distinct incentives, cooldown rules, and monetary effects.

3. Liquidity Dynamics

  • Only the Fed (as a token authority) can mint USD; all USD liquidity must be staked by holders.
  • Swap failure is possible when no liquidity path exists, which is surfaced to users at transaction time.
  • Stakers are naturally incentivized to support tokens with high demand or frequent swaps.

4. Monetary Competition

  • Swap patterns create natural pressure on token policies.
  • Well-governed currencies will be easier to trade and more useful, while poorly managed tokens will face liquidity scarcity.

IX. 🛠️ Implementation Notes

A complete implementation of this protocol requires:

  • Forking the Heiro token service open-source ledger codebase
  • Replacing HBAR with a base-layer USD token
  • Supporting SDK-based integration for financial core providers
  • Integrating Treasury-controlled QR-code note issuance

For details, see: Implementation Notes