Douwe Lycklama, INNOPAY: After years of cash reduction in favour of commercial banks debt money, now central banks can regain some of their position once held in a cash society

This article is originally published on the Paypers.

There hasn’t been too much media around Central Bank Digital Currency (CBDC) plans/projects coming from the US. So far Libra, China’s digital yuan initiative, also known as DCEP, and Sweden’s digitalisation plan have captured the public attention. However, the US has taken strong steps towards adopting digital currencies and in the coming months, we can expect a further acceleration of these.

We continue our series on the topic of Central Bank Digital Currencies and today we are speaking with Douwe Lycklama, co-founder of INNOPAY and co-author of ‘Everything Transaction’ to learn more about US’ plan to drive CBDC adoption.

Substantial development is the somewhat unnoticed bill ‘Banking Act for All’, where potentially all US citizens may end up with a ‘digital dollar wallet’ at the FED. The bill was put to congress already on March 23, 2020 and discussed on a public hearing on June 30, 2020. The project group has published a white paper in May 2020.

The bill outlines that (starting with January 1, 2021) banks must offer these wallets legally segregated from their operations, with the similar functionalities (apps, cards, web) as regular payment account and a no additional cost to customers. The balance of the wallet corresponds one-to-one to the balance of central bank moneys (M0) held by the bank offering the wallet. Adoption is ensured because ‘COVID relief funds’ will be distributed through this FED digital dollar system.

Why is this big? For the first, time citizens get a digital version central bank money, a.k.a. digital cash, or Central Bank Digital Currency (CBDC). That is FED money, which is full reserve, primarily not made of debt created in the commercial banking system. Today only banks and some market infrastructures can hold an account at the FED.

If all this happens, the CBDC isn’t a theoretical topic anymore. Some considerations:

  1. Citizens may find it more attractive to hold their balances in their FED wallet and move their money away from commercial banks. This puts pressure on commercial banks, as this is the digital version of the much-feared ‘bank run’, something to consider carefully when implementing. After years of cash reduction in favour of commercial banks debt money, now central banks can play their part more. At the same time banks will remain crucial for mass customer contacts such as KYC, AML and the overall account and payment proposition. A different business model may be required for CBCDs flowing through the existing ‘plumbing’.
  2. CBDC enables governments to directly stimulate the economy down to every citizen through ‘helicopter money’, a term coined by Ben Bernanke already in 2002, as a policy option to counter deflation. Today’s fiscal stimulus through ‘quantitative easing’ programs mainly inflates financial assets and therefore has difficulty reaching the population at large. On August 27, 2020 FED’s president Jay Powel announced a more aggressive continuation of the US inflationary policy [link]. CBDC’s direct reach may help toward this goal.
  3. Libra’s initiative will provide a global infrastructure for digital token exchange, complementing and accelerating the already existing nascent infrastructures of Bitcoin and Ethereum. CBDC can use this new infrastructure as well, by integrating the FED digital dollar system into these rails. This increases the utility of CBDC as it will have a global reach instantly. This also helps to enforce the US dollar position in the world economy. A second order effect of the adoption of different rails may be the acceleration of Decentralised Finance (DeFi), a movement aimed at replicating some core function of the financial systems, such as checking account, lending, saving and asset trading.
  4. CDBC potentially can be made ‘programmable’ by giving them specific functionalities, e.g., some tokens can be interest bearing, some tokens can only have a designated spending goal or tokens can trigger tax collection. The latter will reduce today's cash-driven informal economy, while the other functionalities influence its application.

The FED is not alone with its CBDC project. Other jurisdictions are working on this as well, notably the Eurozone, Japan, Sweden, UK, and, last but not least, China with their digital Yuan, coinciding with their global BSN blockchain initiative. On August 29, 2020 the Chinese had a supposedly secret soft launch but was pulled back fast when more people than expected showed interest.

In the coming months a lot of developments will come together and propel CBDC into reality: the economic downturn triggered by COVID, fiscal stimulus by governments worldwide, Libra’s introduction, crypto-technologies maturing, citizens seeking refuge for their savings, financial inclusion drive and of course the on-going geo-political currency wars.


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