US coronavirus relief bill includes push for digital currency

This may be one of history's most ambitious welfare programs – made possible by digital currency.

Update 25/3/2020: The latest version of the bill has reportedly removed the language related to digital currency and changed the distribution method to advance tax refunds.

The United States has raised the possibility of "digital dollar" digital currency payments in an act proposed by representative Rashida Tlaib, and a wider coronavirus welfare act helmed by Nancy Pelosi.

Per the act, the following is the definition of a "digital dollar":

• A balance expressed as a dollar value consisting of digital ledger entries that are recorded as liabilities in the accounts of any Federal reserve bank; or
• An electronic unit of value, redeemable by an eligible financial institution (as determined by the Board of Governors of the Federal Reserve System).

Digital dollars will be held in "digital dollar wallets", which are described as accounts for storing digital dollars, tied to physical or digital identities and maintained by a Federal Reserve bank.

In short, it's a straight-up retail central bank digital currency where the central bank itself, rather than an intermediary series of commercial banks, is responsible for the money.

It's been suggested that the actual tangible money to back all this digital currency should be crystallised in the form of two trillion-dollar platinum coins.

For a sense of perspective – perspective around both how much money a trillion dollars is and how utterly weird this timeline is – the total value of all above-ground platinum in the world is estimated to be about US$7.5 billion.

Front end

Per Tlaib's act, the digital currency could be distributed across the country in the form of a pre-loaded debit card that gets periodically topped up with new welfare payments.

These cards could be issued through the following methods:

• Direct mail. People with an active address on file with any government agency get a card mailed to them.
• In-person pickup. People with no permanent address or who otherwise can't get the card in the mail can pick one up from banks, credit unions or other distribution points.
• Outreach. People who are unable to do either of the above can get cards, and general wellness checks, pressed into their hands by an outreach organisation, participating banks and other organisations.

Back end

The central bank holds the money, but "member banks" are obligated to provide "pass-through digital wallets".

These pass-through wallets are essentially a special type of bank account, which will be subject to no account fees or limits, will pay interest and will not be unduly disadvantaged relative to normal bank accounts.

These member banks will be reimbursed each quarter for the relevant costs of offering these pass-through wallets.

"In the long term, the card infrastructure should be converted into a permanent, Treasury-administered digital public currency wallet system to serve as a privacy-respecting ‘eCash’ complement to universal Fed Accounts and/or Postal Bank Accounts for All," Tlaib's act reads.

And just like that, an overhaul of the American banking system around digital currency.

In economics, things take longer to happen than you think they will, and then they happen faster than you thought they could.” - Rudiger Dornbusch

Opinion: End to end

It's CBDC, but the whole system has more in common with digital currency cash transfer programming than anything else.

There are several very good reasons to use digital currency here. One is because there's no other realistic alternative when the goal is to get money into people's hands ASAP and almost unconditionally.

And that is the goal, because dividing prospective welfare recipients into the "deserving" and the "undeserving", and then finding a way of ensuring that only the deserving get paid while the undeserving don't, takes a lot of time and money that the USA doesn't have right now.

The need to easily make recurring payments is another factor, as are security concerns, the need to ensure money goes directly to recipients and the need to keep distribution costs down.

Digital payments are the only real system that works. Bank transfers would be the normal method, but they fall down hard on the fact that they can't adequately reach America's estimated 55 million underbanked people.

That's something like 20% of American households; more than you can reasonably leave out while still calling the program effective. And dropping cash from a helicopter is just plain gauche.

An added benefit will be the enormous load of data the Federal Reserve can access about how people are using the money and where the money goes, which can help better allocate resources in the future.

That kind of data can be abused, but it's also invaluable for allocating resources effectively.

While the US Federal Reserve has previously been less-than-inspired by the risks of CBDC relative to the rewards, it's also worth noting that the curious design of this project helps solve some of the problems.

First, it's a relatively small (a mere $2 trillion at most), finite and gradually-released sum of digital currency. The goal isn't to replace banknotes; it's just to add a new payment system to the mix.

And even though the money itself will be directly guaranteed by the Federal Reserve, there's no risk of a bank run because all the money entered into circulation will be 100% fully backed (in a super theoretical sense) by those two platinum coins.

There are a lot of question marks around what exactly the payment network will look like, how the technical backbone will appear and all those other kinds of more concrete details.

But as former CFTC chairman and current Digital Dollar proponent Christopher Giancarlo said earlier this year, the technical elements aren't the hard part. The hard part is around questions like governance and distribution, which are what this new proposal sets out to address.

At the end of the day, the proposal is among the largest social welfare programs in history, with the Federal Reserve just printing trillions of dollars of money to give away.

Bitcoin's most ardent enthusiasts must undoubtedly be thrilled to see the idea of digital currency, which they have helped promote and grow over the years, pressed into use this way.

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Disclosure: The author holds BNB and BTC at the time of writing.

Picture: Shutterstock, GettyImages