In the rush to revive an economy in crisis U.S. politicians are weighing proposals that could put an end to banking as we know it.
The democrat’s coronavirus response bill initially included legislation that would address the economic fallout from the spread of COVID-19 by setting up individual ‘digital dollar wallets’ for Americans to receive funds directly from the Federal Reserve.
This mechanism, say its supporters, would streamline payments to the 7% of U.S. households that are "unbanked", and the 19% that are “underbanked."
The American financial system would then effectively become nationalized infrastructure, like roads and public libraries. Operational fees would theoretically be lowered, and transactions would clear with instant settlement. More critically, the Fed would have a tighter grasp on the purse strings and the ability to more easily transmit interest rate changes directly to the public.
On the global stage, a digital dollar could help the U.S. maintain the dominant global currency against the threat of China’s digital yuan, which some suggest is set to roll out faster in light of COVID-19.
“FedAccounts” for all
The idea of cutting out private banks with a digital dollar is not new, and was laid out in a lengthy 2018 proposal—Central Banking for All—by Harvard law professor Morgan Ricks.
But it took the coronavirus pandemic to make politicians recognize the need for such a mechanism. Democrats in the United States House of Representatives proposed the digital dollar in their coronavirus response bill of March 22nd. Then in the following counterproposal, all mentions of the digital dollar were removed, but a few politicians are still firmly committed to the idea.
Congresswoman Maxine Waters, who previously headed efforts to block Facebook’s Libra, proposed for comprehensive relief to be provided to citizens through a ‘digital dollar wallet’ maintained by a Federal Reserve bank. This would effectively extend the privilege of holding an account with the central bank—usually restricted to commercial banks—to all citizens, giving everyone a ‘FedAccount’.
In the senate, the idea has been picked up by Ohio Senator Sherrod Brown, who says his proposed legislation “would allow every American to set up a free bank account so they don’t have to rely on expensive check cashers to access their hard-earned money.”
But what exactly the digital dollar wallet would look like under the hood is unclear, and the proposals make no mention of a decentralized ledger.
Meanwhile, Jack Dorsey, CEO of Twitter and Square has expressed his frustration with the slowness of payments to those who need it most. He tweeted, “People need help immediately. The technology exists to get money to most people today (even to those without bank accounts). Square and many of our peers can get it done. US government: let us help.”
There’s no sign Dorsey’s offer will be accepted, nevertheless, the proposals do give a clear indication of the direction of the financial system, and many analysts suggest the ensuing negative interest rates and currency debasement will create the perfect macroeconomic environment for bitcoin to thrive.