• Michael Bacina

CBDC to the rescue? COVID-19 stimulus proposes digital wallets and digital currency

Updated: Mar 25, 2020

UPDATE: The latest version of the stimulus bills have sadly stripped all mention of a digital dollar from the laws mentioned below.

The world's governments have been rushing to implement gargantuan stimulus packages to stave off a recession (or depression) caused by the Western world going into lockdown to stop the march of the COVID-19/Corona Virus.

In HR 6321, a bill "To provide financial protections and assistance for America's consumers, States, businesses, and vulnerable populations during the COVID-19 emergency and to recover from the emergency", introduced by Congresswoman Maxine Waters, is proposing, in order to get cash payments quickly to US consumers, that a "digital wallet" and "digital currency" be issued to facilitate the payments.

Also the "Take Responsibility for Workers & Families Act" (TRWF Act) proposed by Speaker Nancy Pelosi reportedly also contains references to digital currency (but this is not on the Act one page summary currently online).

At the time of writing the Congressional website does not have the text of HR 6321 or the TRWF Act, but NPR is hosting a copy of the document. Forbes appears to be the first to press on this story.

The TRWF Act proposes defining digital dollar as

(A) 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 (B) an electronic unit of value, redeemable by an eligible financial institution (as determined by the Board of Governors of the Federal Reserve System)

and digital dollar wallet as:

a digital wallet or account, maintained by a Federal reserve bank on behalf of any person, that represents holdings in an electronic device or service that is used to store digital dollars that may be tied to a digital or physical identity.

as well as introducing the concept of a 'pass through digital dollar wallet' which is:

a digital wallet or account, maintained by a member bank on behalf of a qualified individual, where such qualified individual is entitled to a pro rata share of a pooled reserve balance that the member bank maintains at any Federal reserve bank.

The TRWF Act proposes a stimulus be paid to a digital dollar wallet (or pass through digital dollar wallet) if possible, and by cheque (or "check" as the US call these strange old pieces of paper that Australia has long left behind) if not.

Critically, Member banks would be required to establish pass through digital dollar wallets for anyone eligible who applied for one, as well as "master" wallets for credit unions and State banks which in turn wished to offer a pass through digital dollar wallet.

The member banks would be required to hold all assets for the wallets in a separate entity (which is an interesting requirement, quarantining these from the normal bank entities) and that holding would be deposits with the Federal Reserve.

This could be deployed in a way analogous to a hot wallet if the system was to use a true CBDC operating a token based US dollar.

These pass through digital wallets would have to pay interest no less than the overnight interest rate on Federal Reserve deposits (analogous to the RBA Cash Rate) and would have no overdraft facility, no fees, and would have to have "functionality no less than existing bank accounts" as well as be "prominently branded in all ... marketing.. as a pass through FedAccount".

The costs of the FedAccount would be reimbursed to the banks by the Federal reserve for "actual and reasonable operating costs" incurred.

There will be more details to come, but this represents a real opportunity for the US to drive a CBDC into reality and on initial consideration, one with a direct line to a Federal Reserve deposit, and with no fees to customers and a direct mirroring of Federal Reserve interest rates, makes this a really interesting proposition. The real question will be whether such a system will only operate as an interbank reconcilation system during the crisis, or perhaps evolve into a true digital USD to be used in external wallets (but let's not get ahead of ourselves).

© Michael Bacina. All rights reserved

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