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Stimulus Payments Delivery During A Pandemic Using FedAccounts And Digital Tools

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The open hearing on Task Force On Financial Technology held today, June 11, 2020 was fascinating. The panelists and their questioners from the House Committee On Financial Services who are members of the Task Force ranged over a spectrum of concerns and solutions around inclusion in banking. The fact that unbanked to the tune of 8.5 million families exist in the US is not new news. Without a bank account, cashing a stimulus check is very costly. The topic of the hearing was how to get stimulus payments to its intended recipients in the most efficient manner.

The expert witnesses, whose names can be seen in the bottom row of the image appended below, brought the debate out into the open. The questioners who were members of the two parties had their favorites and divergence of the two views seem to be clear. One focused on the duties and the charter of the Fed as providing an open and no or low cost financial utility to the public. The other for strengthening the existing payment rails and the two tier banking system; with a private-public partnership.

FedAccounts

The problem of the financial inclusion is persistent. The issue has been looked at many times, Prof. Morgan Ricks reminded the committee that there were hearings in the 80s on the topic of financial inclusion. The scale of the unbanked or under-banked is similar today. Prof. Ricks says that the private sector has not solved this issue. Hence he advocates FedAccounts, which are direct accounts provided by the Fed for citizens. This view is echoed by Prof. Mehrsa Baradaran, who advocates direct FedAccounts as well. Both Baradaran and Ricks favor using post offices as the brick and mortar access points of FedAccounts, as they are a highly trust worthy and may even be the only local institution of the federal government in rural areas. At the moment when USPS is under attack, we have to have the imagination to leverage its strengths.

There are post offices in remote locations, as they are required to as a part of their charter; post offices were established by the first president of the United States, George Washington in 1792. FedAccounts would be used to distribute stimulus and other benefit checks. Today, post offices in the US cannot take deposits; however this is not the case in many other countries, post offices are banks of last resort. Post offices in the US were banks between 1911 and 1966. Today, in the US they can only sell money orders.

The USPS has also been developing their internet presence, and are well placed to compete. They even published a position paper on blockchain before it became popular to do so.

FedAccounts exist today as the reserve accounts of big banks that are used to settle using Fedwire, an instantaneous form of settlement. The only Fed obligation that ordinary citizens have access to is cash, that too at a remove.

One of the biggest arguments against FedAccounts is the fact that they may cause bank runs in crisis times as customers fly to safety. As Ricks noted in many publications, bank runs have been eliminated due to FDIC insurance, another Fed backstop. The main theme of Ricks’ argument has been the fact that short money initiatives by private lenders are backstopped by the federal government either directly through programs like FDIC and indirectly by the purchase of short money liabilities. These operate in areas as diverse as Student Loans and Corporate Debt. Commercial banks have an implicit bailout guarantee that they use to their advantage; leveraging the low cost of such guarantees which are not passed on to their customers, the public.

Central Bank Digital Currency

The closest analog to cash would be a Central Bank Digital Currency. The Honorable Christopher Giancarlo, former chair of the CFTC promotes the digital dollar as a director of the Digital Dollar Project. Giancarlo advocates the digital dollar as a solution to direct distribution of stimulus money. This CBDC would be distributed through a two tier system, similar to cash distribution today. Giancarlo compares the project to the building of critical infrastructure like roads and highways. Quoting the great Wayne Gretsky, whose success was in skating to where the puck is going, Giancarlo feels that the puck is going to CBDC on the blockchain.

Skating to the puck is what the Chinese initiative on the digital yuan is doing. The digital yuan project is also aimed at plucking the crown of the global currency from the dollar. Giancarlo insists that the digital dollar built with the cultural DNA of the United States, based on the rule of law and individual initiative, with built-in privacy and based on innovation will prevail in the long run. However one has to commence to build the digital dollar. When asked about the possibilities of frauds and scams on the system as well as the preservation of privacy, Giancarlo framed a pathway to the digital dollar that is incremental and cautious with multiple proofs of concepts and limited experimentation. This may not address the needs of a stimulus package today. In time, it will be fit for purpose for the digital natives, who will be very comfortable with a mobile digital wallet. They are a high proportion of the unbanked. However no technical details or even sketches about the technical direction for a digital dollar are available now. We are still in the whitepaper stage.

Giancarlo expressed a view that the young everywhere and the folks in rural America are very comfortable with mobile devices. If broadband access is solved and if low cost mobile devices are provided, it may be even more easy to use CBDC as an on-ramp into banking services rather than relying on brick and mortar banks.

Pre-loaded Debit Cards

As a representative of a trade association, Jodie Kelley, CEO of the Electronic Transaction Association, represents private entities who are the payment rails of retail and B2B commerce. Kelley says that enhancing the current payment rails will solve the problem of the unbanked. Kelley’s members account for a $8.5 trillion ecosystem. She advocated the use of no cost wallets, to be integrated into the very secure system of electronic commercial wallets to distribute stimulus checks. Kelly also talked about the convenience of using debit cards which are no cost and highly protected against fraud and misuse and capable of being reloaded as part of the solution. The vast majority of the unbanked, even those out of touch of wifi and or broadband will be comfortable using these cards.

Security Token Offerings, Token Taxonomy And Other Topics

It was flabbergasting to hear the term Token Taxonomy Act during the hearing. Token Taxonomy is a specialists term relating to how tokens are defined in a generic sense using composable elements. Token modelers use that term. So when a congressman utters it, it seems like we are in a different era. That gentleman, Warren Davidson from the Ohio 8th congressional district has been a crypto-currency enthusiast. Davidson has entered a letter supporting Blockchain technologies and crafted a bi-partisan bill to clarify the position of Digital Assets, especially of Security Token Offerings (STOs). Davidson’s question to Giancarlo underscored his defense of the existing stable coin, cryptocurrency and other markets. In short, does the development of a digital dollar come at the expense of these alternate rails?

Giancarlo said that the free market will sort out the winners from these many alternatives, and even praised Libra for highlighting the inefficiencies of our system. Which is ironic in this response to Davidson, who famously called Libra a shitcoin. Giancarlo emphasized that the digital dollar will be a fundamental element of the economy and the economic activity around the dollar relies on the dollar to modernize, which will be realized through the digital dollar project.

A marriage of the two seemingly divergent views is how progress could be achieved. A system that is built by the Fed as a payment utility that services the needs of even the most destitute and unbanked is possible. FedAccounts will need a robust digital wallet. The USPS can help by being the retail footprint.

The USPS and the Fed already have a very well regarded security force, who have to be strengthened with cyber-security expertise. The Fed administers a huge settlement system now, with low breaches. Further protection in the form of severe penalties for fraud and crime will be needed. Although the proponents of FedAccounts seem antithetical to the idea of blockchain; this may be necessary for centrality to be lessened, not just in a governance sense; but also in the sense that most transactions are going to be low touch, with smart contracts and AI monitoring and watching over most of the transactions.

To build an analog to cash, private and uncensored for ordinary peer to peer bearer transactions, but yet KYC and AML aware is another challenge that has to be solved. KYC/AML is performed today as if it were a blunt instrument, can be context aware, as only transactions beyond a certain amount have to be justified; excluding 99% of day-to-day retail transactions from that level of scrutiny. This fits in nicely with the programmability of the digital wallets and smart contracts. Of course only possible with the kind of CBDC proposed by the Digital Dollar Project.

The multiple payment rails that exist today will continue and more will join the ecosystem. Some of these may have to be purpose built for distributing stimulus payments more efficiently. The creation of a secure digital wallet bank-rolled by the Fed, a system of pre-loaded debit cards, a digital dollar with FedAccounts for the distribution of benefits, a post office system to supplant banks, especially in rural areas, all of these could exist simultaneously. Regulatory clarity and clear penalties for misuse are necessary. The pandemic will hasten our transformation, congresspeople are holding hearings that seemed unthinkable just a few months ago.

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