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 Banking

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.
  • Staking does not provide liquidity for swaps or lending — it only locks supply.”

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 transaction.
  • 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.
  • Support for multi-token expansion; see Currency Swaps and Liquidity for mechanics.
  • 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. All swap liquidity is provided by independent token holders who voluntarily deposit into two-token pools. The protocol does not stake or route user funds.

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 incentivized by yield, which is set by token authorities as a tool to throttle monetary velocity.

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