Paper bank notes are being upgraded for a digital future around the world
The Federal Reserve has never been more famous than it is today. It drew praise, and ire, for its handling of the financial crisis a decade ago, and the extraordinary measures it took subsequently to stimulate the U.S. economy have made it an important driver of financial markets. Meanwhile, President Trump has made its chairman, Jerome Powell, a household name by frequently criticizing the central bank’s policies on Twitter and to the press.
A movement, meanwhile, has been brewing among economists, financial-services professionals and central bankers to encourage a rethinking of the technology of currency — those paper notes we carry in our wallets — with an eye toward issuing a digital currency. Some argue that could give central banks the tools necessary to break free of chronic disinflation and persistently low or negative interest rates, while providing Americans a risk-free means to transact in a world where digital commerce constitutes a growing share of the economy.
“The debate isn’t about whether we need [a digital currency],” Michael Bordo, an economist at Rutgers University and a fellow at the Hoover Institution, the public-policy think tank at Stanford University, told MarketWatch. “It’s about how you do it.”
Americans already use digital currency for most of their purchases. In 2018, they used physical dollars for just 26% of transactions, versus 62% with digital currency, which includes credit cards, debit cards and bank transfers, according to the Fed.
A central-bank digital currency could work much like the mostly bank-issued digital money Americans use today, with some key differences. First, it would be backed by the full faith and credit of the United States government and, therefore, risk-free. The local bank that manages your savings account could fail at any time and the dollars in your account (beyond those insured by the FDIC) would disappear. A Fed “e-dollar” would persist as long as the U.S. government does.
More important, an e-dollar could pay interest. The idea that cash should pay interest dates back to monetary economist Milton Friedman, who argued in 1969 that the most efficient monetary system would be one in which cash bears interest equal to that of short-term government bonds, to encourage greater use of the dollar.
In good times, earning interest on your e-dollars would simply make everyone a little richer, but in times of crisis it could also be used to institute negative interest rates, essentially a tax on holding cash. Such a policy would likely strike Americans as governmental overreach, but, Bordo argued, the alternative is worse.
Central bank ammunition
The current economic expansion is the longest in U.S. history, but warning signs of a recession abound, including slowing economic growth and the recent inversion of the yield curve for U.S. government debt. In response, the Fed reduced interest rates in July and hinted at more cuts to come. But economists worry that the Fed will not have enough ammunition to fight the next downturn, as the central bank has typically had to cut rates by at least five percentage points to stimulate the economy following a recession.
The Fed may be forced to restart its program of “quantitative easing,” or the purchase of long-term government debt to push down long-term interest rates, though there is growing concern that this is an ineffective tool. Take a look at Japan, which has been mired in a decades-long economic malaise. Interest rates have been stuck near zero for almost 20 years. Despite a massive program of government bond buying that has led to the Bank of Japan’s owning more than 40% of all Japanese government debt, it has still suffered four recessions over the past 20 years.
The eurozone hasn’t fared much better despite imposing negative interest rates on large banks, as it’s suffered two recessions since the financial crisis.Bordo said the problem with negative rates in Europe and Japan is that, without a central-bank digital currency held by the public at large, those rates can only be imposed on banks, which hurts banks’ ability to lend and does little to encourage the magnitude of spending needed to jolt economies back to normal levels of growth.
The U.S. economy could soon face the same situation, Bordo said. “We could be in a situation like Japan,” he said. “The way things are going in the world, where growth is slowing and deflationary pressures persist, we’re probably headed in that direction.”
How would it work?
The Federal Reserve already issues digital dollars, but only banks can use them. They’re called “bank reserves,” and this form of digital currency received a great deal of attention over the past decade for its role in the Fed’s quantitative-easing program, with the Fed buying government bonds from banks and giving them newly created digital bank reserves in return. Banks can settle debts among themselves using this digital currency, but it never circulates in the consumer banking system.
One way the Fed could implement the e-dollar is by simply allowing any American to open an account at the Federal Reserve, where other forms of money, like a check from an employer or a deposit at a private bank, could be exchanged in e-dollars.
“The only way we can transact with central-bank money today is to use reserve notes, but digital payments are now the norm,” said Ousmène Jacques Mandeng, an economist at the London School of Economics who spent much of the past two decades working for financial institutions including Credit Suisse and UBS. “If you wanted to buy something on Amazon, you can’t pay with central-bank money. Shouldn’t central banks say that our money can be used in this environment? It’s a very practical issue of public choice.”
Meanwhile, an e-dollar system could be engineered so that payments are nearly instantaneous and costless, Mandeng said. This would be a major upgrade for many Americans, who now pay hefty fees for wire transfers. Newer payment services such as Venmo and Google Wallet, meanwhile, rely on automated clearing house, or ACH, exchanges that often take days to process money transfers.
A concern among economists is that personal Fed banking accounts could erode private banks’ profitability and, therefore, reduce the flow of credit they provide to businesses and consumers. Others argue that banks would simply change their business models, and could attract deposits by offering higher interest rates than cash would bear, or by offering discounts on loans and other services for customers who maintain a certain balance.
But given the risk that an e-dollar could significantly harm the banking system, proponents of a central-bank digital currency say the safest approach would be to allow supervised commercial banks to offer specially designated accounts for it.
While regional Fed banks have produced research that points to significant economic benefits from a central-bank digital currency, the Federal Reserve Board of Governors declined to comment for this story. In addition, the board’s public comments have revealed a skepticism on the potential benefits to consumers. In a May 2018 speech, Fed Gov. Lael Brainard said “there is no compelling demonstrated need for Fed-issued digital currency,” because consumers and businesses can use private digital currency already.
Meanwhile, the Fed announced a plan Aug. 5 to develop a service called FedNow to allow banks and fintech companies to offer real-time money transfers, which will create stiffer competition for the ACH system run by the bank-owned Clearing House Payments Co., thus undercutting one argument for a central-bank digital currency.
Fighting monopoly power
For some central banks around the world, neither convenience nor better implementation of monetary policy is the primary reason for considering the issuance of digital currency. The Swedish Riksbank, for instance, is most concerned with the rapid decline in cash usage in its domestic economy, which has been much more pronounced than in the United States. The nominal value of cash in circulation in Sweden has fallen 50% over the past decade, and cash now accounts for only 13% of Swedes’ purchases, according to Hanna Armelius, senior adviser at the Riksbank.
The decline, she said, threatens to create a negative feedback loop — as fewer Swedes prefer cash, more merchants will decline it as payment — and the Riksbank does not want to find itself in a situation in which the public has no access to the central bank’s currency.
“At the Riksbank we would like it if [nondigital] cash continues to be in use, but we have to be prepared that the marginalization of cash will continue,” she said. As private digital money plays a greater role in the economy, “we could end up in a situation where one or two companies become so dominant that they can extract monopoly rents.”
Todd Keister, a visiting scholar at the Federal Reserve Bank of Philadelphia, echoed that concern. “Monopoly power concerns are important,” when thinking about central-bank digital currency, he said. “There is a natural monopoly in payment networks. What’s to stop Visa V, -2.05% and Mastercard MA, -2.56% from raising their fees? Enabling an alternative for transacting digitally is really important.”
A wake-up call for many central bankers has been Facebook Inc.’s FB, -2.88% proposed cryptocurrency, Libra. Given Facebook’s scale — it claims nearly 2.5 billion users worldwide — a successful rollout of its own digital currency could give it unprecedented power over the global economy.
Cash usage in the United States is nowhere near as low as in Sweden, but studies suggest that it is declining, from 31% of all transactions in 2016 to 26% in 2018, with cash use most predominant in small transactions. Only 6% of purchases of more than $100 were made with cash last year, according to the Federal Reserve.
There is anecdotal evidence, meanwhile, that businesses are increasingly refusing to accept cash. State and local governments have been combating this trend with legislation forcing stores to accepting payment in cash out of fairness to the roughly 15 million Americans who don’t have access to debit cards or other digital forms of money. Proponents of the e-dollar say it could offer a cheap, safe means for poorer Americans to transact in digital money while also giving businesses the freedom to refuse paper money if they find it cumbersome.
Alan Blinder, former vice chairman of the Federal Reserve Board of Governors, said in an interview with MarketWatch that maintaining a public role in currency, and constraining the monopoly power of potential issuers of digital money and current players in the payment space, is a reason for the Fed to start taking the issue seriously now. “In paper currency, the Fed has a legal monopoly — nobody else is allowed to do it,” he said. “It’s called ‘counterfeiting.’ ”
Blinder added that the Fed hasn’t, and won’t, take the same approach to digital currency, but he said it could prevent monopoly power in the space by “coming in with its own competition,” and issuing a digital currency that would serve as a “public option” in the marketplace of digital money.
The next evolution in monetary policy
This is not the first moment in American history when there was debate over whether public or private institutions should be the primary currency issuers. The Constitution grants the federal government a monopoly on issuing coined currency and to define the national monetary unit, which Congress named the “dollar” in 1792. But transacting in gold and silver coins is cumbersome and expensive, and so paper currency, issued by a variety of state-chartered banks, and the federally chartered Bank of the United States, quickly became the young republic’s primary medium of exchange.
Following the dissolution of the Second Bank of the United States in 1837, a system of “free banking” developed, whereby entrepreneurs were allowed to launch banks with relative ease, as long as they met a certain standards set by the states. The system was not ideal for interstate commerce, as businesses had to keep track of the market values of the many notes in circulation, some of which were counterfeit or issued by failed or insolvent banks.
Rutgers economist Bordo said there are parallels between today’s Wild West of digital currencies — in which increasingly popular debit and credit cards exist alongside cryptocurrencies such as bitcoin and etherium — and this past era of free banking in America, a period marked by frequent financial crises and bank failures. The U.S. economy suffered from high transaction costs inherent in an economy marked by currency competition.
That system fell apart during the Civil War, with Congress passing legislation in 1864 that enabled the Treasury Department to issue paper currency, not convertible to gold or silver, that was deemed legal tender for debts public and private. The law was necessary to help finance the Union’s war effort and set in motion a series of statutes that ended state-chartered banks and created a national banking system, wherein federally chartered banks distributed U.S. dollars backed by gold. U.S. dollars wouldn’t be directly issued by the government until the Federal Reserve System was established in 1914, to create a single institution to manage the money supply and oversee the banking system.
The trend of more control over paper currency by the U.S. Treasury and Federal Reserve increased the efficiency of the U.S. economy and boosted growth, and many economists expect that a central-bank digital currency would do the same. John Barrdear and Michael Kumhof, research economists at the Bank of England, estimated that the introduction of central-bank digital currency could increase the size of a given economy by 3% “due to reductions in real interest rates, in distortionary tax rates, and in monetary transaction costs.”
Supercharging blockchain innovation
Though central-bank digital currency as envisioned by most prominent researchers would not be a cryptocurrency, believers in blockchain technology see central-bank digital currencies helping to unleash its potential.
There has been considerable hype around the idea of using blockchain to “tokenize” such illiquid assets as real estate, fine art and gemstones and allow investors around the world to trade slices of these assets with the same ease as they trade stocks and bonds today.
“If you accept tokenization is going to be important, then these ecosystems, like all other financial market infrastructures, will ideally have access to central bank currency for financial settlements,” said the London School of Economics’ Mandeng.
“Central banks should be technology-neutral,” he added. “If [the Fed] allows banks to settle their transactions in central-bank money, why shouldn’t individuals who trade in tokenized assets have the same access to this risk-free currency?”
Will the e-dollar see the light of day?
While the Federal Reserve is unlikely to issue e-dollars anytime soon, it will surely be watching digital-currency experiments undertaken by central banks around the world.
The National Bank of Cambodia is issuing its own blockchain-based digital currency to make its underdeveloped banking and payment system more efficient. The currency will be usable both on private mobile payment applications and commercial bank accounts, giving its underbanked population access to safer and more secure forms of payment. The Bank of Canada, the Bank of England and Norway’s Norges Bank have also been seriously studying the issue. Sweden appears closest to adopting its digital currency, the e-krona, after its parliament set up a formal inquiry into the question.
The Riksbank’s Armelius told MarketWatch that the disappearance of cash, and potential associated problems, “has been a political issue for years now,” and estimated that the process of implementing an e-krona “will take years, not decades.”
Meanwhile, Bank of England Gov. Mark Carney proposed in a speech on Aug. 23 at the Kansas City Fed’s annual summit in Jackson Hole, Wyo., that central bankers around the globe could coordinate to issue a digital “Synthetic Hegemonic Currency” to replace the dollar as the world’s reserve currency. He suggested that such a tool could eliminate problems that have resulted from the U.S. dollar’s serving that purpose, from erratic capital flows in emerging-market economies to an overvaluation of the greenback that can suppress American exports.
As for the e-dollar, Blinder, the former Fed vice chairman, argued that the U.S. central bank has the power to implement a digital currency via authority already granted it by Congress. But, he added, it’s unlikely to make such a move absent broader political consensus.
What may bring about this consensus is another question, and Bordo of Rutgers pointed to U.S. history as providing a potential answer. He said that big shifts in currency policy have typically occurred “when the politics line up” due to some sort of crisis. The system of free banking was ended only because of the exigencies of the Civil War, and the Federal Reserve System was created from the wreckage of the 1907 financial crisis.
As economic storm clouds gather over the United States, and as the Federal Reserve appears to lack the ammunition to save the country from the sort of prolonged malaise that has overtaken other wealthy economies, it’s possible that the next crisis-driven revolution in monetary policy is at hand.
“What makes the politics line up is the next recession,” Bordo said. “When they find that the tools they have aren’t working, then the arguments will start to be listened to.”
Programmable Digital Currencies Are Coming – Here’s What That Means
On Aug. 13, a top official confirmed that the U.S. Federal Reserve is preparing for a digital currency.
Lael Brainard, a member of the Federal Reserve Board of Governors since 2014, told an audience last week that the Federal Reserve was experimenting with “a hypothetical digital dollar for research purposes,” according to Bloomberg.
Brainard also said the Federal Reserve was partnered with research teams from the Boston Federal Reserve and the Massachusetts Institute of Technology (MIT) in a “multi-year effort to build and test a hypothetical digital currency oriented to central bank uses.”
The challenges for a “digital dollar” include security and privacy concerns for a technology that would reach hundreds of millions of people and could easily see billions of transactions per day.
This Fed-enabled digital dollar will also be designed with an ability to bypass the banking system.
Imagine a network of consumer digital wallets — perhaps associated with a government ID, like a social security number — with an ability to receive digital dollar deposits directly from the central bank, or conversely to have digital dollars taken out.
Bypassing the banks would be game-changing on multiple fronts.
In terms of distributing stimulus or emergency funds, the U.S. government and Federal Reserve would have a level of fine-tuned control like never before. Payments could be sorted out by income level, employment status, geographical location, or any number of other things.
Digital dollars would likely also be programmable in and of themselves, allowing for instant tax payments at the point of sale. Tax refunds and rebates could be instant, too.
And attempts to purchase a restricted item — like, say, a firearm without proper background clearance — could be automatically denied.
In many ways, programmable digital money would be a fantasy come true for economists. This is because economists believe economies are driven by human behavior, and human behavior is driven by incentives, and all kinds of incentives could be built into digital money.
Imagine, for example, a maximum limit on the loan-to-value (LTV) ratio of home mortgages, designed to prevent future housing bubbles.
If such limits were programmed into the digital currency, as a form of “smart contract,” the transaction would not go through for a loan amount deemed too large.
Economists, political leaders, and central bank officials could then use the “smart contract” feature of digital dollars to tweak or massage incentives in all sorts of ways.
For example, fossil fuel use might be embedded with a higher VAT (value-added tax) surcharge than green energy use. Buying sugary cereal might create a small debit, whereas buying broccoli creates a small credit. And so on.
In addition to the above, all transactions would be instantly available for review, or easily aggregated into “big data” analysis patterns. This would give the Federal Reserve unprecedented new levels of visibility into the current state of the economy.
With programmable digital currency, and the ability to adjust lending parameters and other incentives via smart contracts, it could even become possible for the Fed to enact different versions of monetary policy for one part of the country versus another. In the Western states where inflation is running hot, the Fed could have tighter policy; in the Southeast where the economy is more stagnant, the Fed could have looser policy instead. And all conditions could be monitored, and modeled, in real time.
Programmable digital currency would also be a kind of monetary panopticon, spying on everything you do by way of transaction data. The use of digital wallets, and accounts linked to a government ID, would thus further tighten any government’s grip on its citizens.
All of this explains why digital currency is absolutely coming, not just for the United States, but for all industrialized countries. The hypothetical power, visibility, and control inherent in such a tool will prove impossible to resist.
This is why central banks everywhere are either running in-depth experiments, launching full-fledged digital currency initiatives, or even preparing to fine-tune and scale a prototype digital currency as rapidly as possible. China is well ahead of the game in this regard.
The rise of central bank digital currencies, or CBDCs for short, will not be a stumbling block for Bitcoin. In fact, it will likely be the opposite. The prevalence of CBDCs will make Bitcoin all the more desirable as a non-state-controlled alternative.
The coming digital dollar, call it the “smart dollar,” will be far more versatile and powerful than the old dumb dollar. The smart dollar will have encoded instructions as to where it can go and what it can do — and those instructions will be upgraded by policymakers in real time.
But a smart dollar will still be a fiat dollar, meaning, the Federal Reserve will maintain the ability to create trillions of new ones any time it chooses. That means the same old supply and demand issues — and the trouble of too much supply — will be as big a problem as ever.
Bitcoin, meanwhile, will remain “outside the system” to the extent no central bank, or any other form of centralized authority, will be able to control it. And Bitcoin will remain permanently limited in supply, due to built-in mathematical rules.
In many ways, the dawning of CBDCs — like the coming digital dollar — will be a good thing. In various other ways, however, a central-bank-issued digital currency will range from nuisance to nightmare.
Bitcoin is likely to be a welcome alternative, and a natural vehicle for saving and storing wealth — via the routine sweeping of assets into BTC — whereas a local CBDC used in day-to-day transactions might be kept on hand in smaller amounts, as a form of petty cash.
By Justice Clark Litle for TradeSmith.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Forbes: U.S. Moves Closer To Digital Dollar
On June 30th, 2020, the Senate Banking Committee held a hearing on the future of the digital dollar. The pressures to create a digital USD are mounting as China recently began testing its own digital currency – the DCEP, which will be included in popular applications like WeChat and AliPay. Of particular concern is widespread adoption of a digital yuan in emerging markets and in international trade.
The idea of a dollar-backed digital currency gained mainstream media attention last year during the Libra congress hearings, where Facebook introduced a new type of digital unit backed by a basket of currencies and commodities.
Although David Marcus insisted that Libra users will not have to put their trust in Facebook and that Libra was a decentralized currency, regulators weren’t buying it and expressed concern over the long-term threat to the traditional financial system. On July 9, 2019, regulators requested a moratorium on the project.
In December, Libra released a new roadmap, proposing several digital-fiat currencies deriving their values from the USD, British Pound, Swiss Franc and others, thus creating an efficiency layer on top of the current financial system. Users would be able to access these digital currencies through a wallet installed on their phone, and potentially through WhatsApp chat and Facebook Messenger.
Distribution issues of the $1200 COVID stimulus checks, created new momentum for the digital dollar (and a more efficient financial distribution machine). It is no secret that many are still waiting for their stimulus checks, while $1.4 billion in stimulus was sent to dead people.
Most recently, Congresswomen Rashida Tlaib (D-Mich.) and Pramila Jayapal (D-Wash.) introduced a new stimulus proposal of $2,000 per month to residents through the Automatic BOOST to Communities Act (ABC Act). Under the ABC Act, Congress would authorize the Federal Reserve to create “FedAccounts,” or “Digital Dollar Account Wallets,” which would allow U.S. residents and business to access financial services through an app on their phone.
Building on this momentum, the Senate Banking Committee continued the discussion of the digital dollar yesterday.
Some highlights from the hearing include:
- Senator Tom Cotton (R-Ark.) stated, “The U.S. needs a digital dollar…The U.S. dollar has to keep earning that place in the global payments system. It has to be better than bitcoin … it has to be better than a digital yuan.”
- Chairman Mike Crapo (R-Idaho) expressed concerns of regulator oversight for stable-coins.
- Charles Cascarilla of Paxos testified advocating for stable-coins, stating that they address the “antiquated plumbing” of our financial system as well as financial inclusion. “Blockchain based stable-coins allow everyone access”.
- Nakita Cuttino, visiting assistant professor of law at Duke University, discussed the friction in the current payday cycle and the rising demand for costly advanced-payment apps which could be resolved with digital currencies. “In the absence of public policy addressing open access payments and real-time payments, low-income and moderate-income Americans will continue to have limited resources needed, whether by traditional fringe services like payday loans or some novel fringe service.”
- Former CFTC Chairman Chris Giancarlo and head of the Digital Dollar Project, emphasized the “social and national” benefits such as increased speed, lower costs and issues of financial inclusion. “Darwin said the most adaptable survive. And I think that is true when we transition to a new architecture. To adapt to it, will help bring benefits to the society at large.”
It is unclear how soon the digital dollar will come into existence, although increasing competition from China may be the push U.S. regulators needed.
Bloomberg: Two Ex-Fed Officials Have a Faster Way to Distribute Money in Recession
Julia Coronado and Simon Potter say recession insurance bonds could activate payments and bypass political wrangling in a crisis.
The coronavirus pandemic that shut down economies around the globe showed how crucial—and difficult—it is to get money swiftly to people who need it most in a crisis. Former central bank officials Simon Potter, who led the Federal Reserve Bank of New York’s markets group, and Julia Coronado, who spent eight years as an economist for the Fed’s Board of Governors, are among the innovators brainstorming solutions. They propose creating a monetary tool that they call recession insurance bonds, which draw on some of the advances in digital payments. Coronado, president and founder of MacroPolicy Perspectives LLC, and Potter, nonresident senior fellow at the Peterson Institute for International Economics, spoke with Bloomberg Markets to explain their idea.
JULIA CORONADO: Congress would grant the Federal Reserve an additional tool for providing support—say, a percent of GDP [in a lump sum that would be divided equally and distributed] to households in a recession. Recession insurance bonds would be zero-coupon securities, a contingent asset of households that would basically lie in wait. The trigger could be reaching the zero lower bound on interest rates or, as economist Claudia Sahm has proposed, a 0.5 percentage point increase in the unemployment rate. The Fed would then activate the securities and deposit the funds digitally in households’ apps.
And so instead of these gyrations we’ve been going through to get money to households, it would happen instantaneously.
SIMON POTTER: It took Congress too long to get money to people, and it’s too clunky. We need a separate infrastructure. The Fed could buy the bonds quickly without going to the private market. On March 15 they could have said interest rates are now at zero, we’re activating X amount of the bonds, and we’ll be tracking the unemployment rate—if it increases above this level, we’ll buy more.
The bonds will be on the asset side of the Fed’s balance sheet; the digital dollars in people’s accounts will be on the liability side.
BM: Aside from speed, what are the main advantages of this approach?
JC: It’s the most efficient from a macroeconomic standpoint in supporting spending and confidence. The fear of unemployment acts as an accelerant on a recession. There’s a shock—people are losing their jobs or worry about losing their jobs. They get very risk-averse. [By] getting money to consumers you can limit the depth and duration of a recession.
And you could actually generate real inflation. It could be beneficial for not only avoiding negative rates but creating a more healthy interest-rate market, a more healthy yield curve.
BM: What are the origins of the idea?
JC: The Bank of England has proposals for digital currency. And a number of people have talked about the need for monetary financing—the idea that the interest-rate tool is simply less effective in lower growth, slower credit growth economies. Helicopter money [making direct payments to the public] goes back to Milton Friedman, but Ben Bernanke revisited it.
Some people proposed doing that through financing fiscal stimulus. We think going directly to consumers is more efficient than wading through that sticky fiscal process.
BM: This policy could be complementary to Treasury stimulus?
JC: It’s not a replacement for fiscal policy. It makes sense from a fiscal perspective, for example, to authorize unemployment insurance benefits for people who lose their jobs and other assistance for medical-care providers in the current situation.
SP: The central bank is not elected. It cannot make allocation decisions about fiscal transfers. It’s now being pushed to make allocation decisions around credit with the Treasury, because we believe this situation is so unique that the private sector cannot make those decisions itself.
The simplest way to do this would be a lump sum. Not in the way Congress did it. We’d take the bluntness of monetary policy and say anyone who’s eligible should get the same amount of bonds.
Fiscal controls could use the same infrastructure. The imperative to invest in it is high. Nearly all Treasury payments at some point touch the Fed because it’s the Treasury’s bank. The digital payment providers—called interface providers in the Bank of England proposal—would manage these accounts and link them to the Fed and Treasury.
BM: What are the objections from the Fed, and other challenges?
SP: The reaction from some of my former colleagues a while ago to the notion of helicopter money was not the most embracing. Some of those concerns have disappeared.
The two objections were related to the switch of deposits in normal times from the traditional banking system into digital accounts and the extra stress in crisis times as people want to get safe. An account with the central bank is safe because the central bank can always print money to honor that claim. A private bank can’t do that because their asset side has all kinds of credit on it. What we’ve created is a narrow bank-type model [narrow banks only take deposits and invest them in the safest assets] that’s small and fit for purpose, with a cap of $10,000 [per person].
JC: One challenge is making it profitable for digital providers. We want strict limitations on the fees so we’re reaching people that are underbanked, but we also want a public-private partnership with a diversity of competitors jumping into this market.
Privacy is just as important, because one thing that might induce them is access to people’s data. As the Fed, are you blessing that, and what structure do you put around that?
SP: We’ll all have to deal with deep questions of privacy in the digital world. One of the issues Congress had in passing the Cares Act is identifying who’s got mainly tip income, who doesn’t have sick days. If society wanted, you could use large datasets to direct fiscal transfers to those people. But that’s a job for Congress.
BM: Have you seen similar trials elsewhere?
SP: Sweden is a leader in thinking about this in part because they had a large decline in cash use. China is testing versions of digital currency. Fintech firms in the U.S. are interested in this—there’s a stable coin version of our proposal.
There’s easily sufficient innovation within the U.S. to do this. How to do it in a way that’s well regulated and serving the public purpose is something the Fed should focus on over the next few years. It would be a key accomplishment of the Fed and Treasury to get this infrastructure in place.