Trillions of dollars in federal COVID-19 stimulus payments are being disbursed through paper checks, prepaid debit cards and direct deposit — not very streamlined conduits when Uncle Sam needs to deliver aid speedily so that it’s most effective.
The concept of creating “digital dollars” for these payments has been floated on Capitol Hill in recent months, and the debate got more illumination Thursday (June 11) when a congressional task force heard testimony from experts on the subject.
Rep. Stephen Lynch of Massachusetts, chairman of the House Committee on Financial Services’ Task Force on Financial Technology, noted that stimulus such as the $1,200 payments recently made to most adult Americans “was all with the intent to provide immediate relief to those most likely in need of it. Seventy-six days later, some Americans are still waiting on this so-called ‘immediate relief.’ Many of those people who needed the help the most were the last to receive it.”
He cited long standing inequities and inefficiencies in the U.S. financial system, where many Americans still lack access to basic banking services. Lynch noted that as many as 8.5 million households don’t have bank accounts — often “because bank accounts are too expensive.”
The congressman said that as a result, some Americans had to pay “exorbitant” check-cashing fees on their stimulus checks. That has some lawmakers calling for creation of digital dollars for stimulus payments.
The debate touches in part on the place physical cash, checks and ACH play in an increasingly digital age. In March, a proposal in Congress called for creating a digital currency that would be “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).”
The proposal — which never went anywhere — came shortly before the Bank of International Settlements reported that 80 percent of 66 central banks queried were working on digital currencies. So, the question might be not if digital currencies will find their way into the financial system, but when — and how.
In the United States, one proposal calls for the Federal Reserve to issue digital dollars tied to new retail accounts at the central bank (called FedAccounts.) As PYMNTS noted earlier this year, that would imply that the Fed would compete with some of the very banks it regulates, unless digital dollars were distributed through retail banks to end users’ accounts/digital wallets.
Thursday’s hearing was titled “Inclusive Banking During a Pandemic: Using FedAccounts and Digital Tools to Improve Delivery of Stimulus Payments.”
Morgan Ricks, a Vanderbilt University Law School professor, testified that the Fed already offers digital dollar accounts to a “small favored set of clients” — chiefly enterprises such as banks and other financial institutions (FIs). He said the accounts involve dollar balances maintained as ledger entries on the Fed’s electronic books.
The professor said that at least two policy levers can bring underbanked households into the financial mainstream. One approach would be to “impose universal service requirements” on banks, he said. The other would be to supply digital money and payment services to the public at large. Ricks said FedAccounts would not only help the unbanked, but it would also help maintain the U.S. dollar’s status as the dominant global currency.
Christopher Giancarlo, senior counsel for Willkie Farr and Gallagher and co-founder of the Digital Dollar Foundation, said at the hearing that digital dollars would help get pandemic relief to recipients immediately to underbanked populations through eWallets. He recommended the exploration of digital dollars through pilot programs conducted jointly by the Fed and the U.S. Treasury.
Jodie Kelley, CEO of the Electronic Transactions Association, said technologies like Venmo and PayPal have expanded access to secure payments and financial services. She added that about 80 percent of Americans have access to smartphones “and have great facility with them” — a good sign for digital dollar usage.
However, Kelley added that the 20 percent of Americans who don’t have smartphones show that “clearly there’s a gap.” She also noted that lower- and middle-income Americans who lack smartphones tend to prefer debit cards.
Statista.com estimates there are roughly 275 million U.S. smartphone users among the country’s approximately 330 million people. That includes an estimated 209 million U.S. adult smartphone users, indicating that banking-age individuals are well-equipped to connect to electronic banking.
But Mehrsa Baradaran, a University of California/Irvine law professor, said the U.S. recession currently underway will make already-extant problems for the unbanked “more acute.” She noted that some Americans have had to wait hours in line at ATMs or tap into alternative service providers.
Baradaran urged Congress to authorize basic checking accounts at the U.S. Postal Service in partnership with the Federal Reserve Payments System. After all, she said, people with digital accounts also need physical access locations in her view.
It’s worth noting that postal banking existed for a while in America, but it petered out after 1967. Establishing postal banking now at the height of what looks like a new virulent strain of recession would basically link the most vulnerable U.S. populations to the government as creditor when defaults loom.
Thursday’s hearing came as Reuters reported that digital currencies are taking on new urgency in the COVID-19 era, as noted during an online event held by the think tank CEPR and the London School of Economics.
“There is little evidence that cash transmits the virus, but COVID-19 has caused an unprecedented experiment in digitalization across our lives,” Benoit Coeure, head of the Innovation Hub at the Bank for International Settlements, said at the event, per Reuters. “COVID-19 will be remembered by economic historians as the event which pushed [Central Bank Digital Currency] development into top gear.”