The Digital Dollar May Play A Role In Serving Underbanked Communities

Lawmakers gathered virtually on Thursday, June 11 to discuss how the government can efficiently disperse federal payments —including stimulus checks and federal benefits — after COVID-19 revealed weaknesses in the current distribution system.

The Task Force on Financial Technology gathered with four witnesses to discuss leading ideas on how to support underbanked communities during times of crisis. Witnesses included Professor of Law at University of California, Irvine Mehrsa Baradaran, Professor of Law at Vanderbilt University Morgan Ricks, CEO of the Electronic Transactions Association Jodie Kelley, and Co-Founder of the Digital Dollar Project Christopher Giancarlo.

The meeting opened with a description of the barriers faced by the Federal Reserve to distribute stimulus payments to those most in need during the COVID-19 pandemic. Congressman and Chairman of the Task Force Stephen Lynch stated that 8.5 million American households do not have bank accounts. These people received their stimulus money late because physical checks had to be mailed. In addition to late payments, those who received physical checks also faced exorbitant check cashing fees.

Professor Baradaran raised that over 93% of bank closings over the last ten years have been in lower middle income communities. These communities are also discouraged from joining the financial system given banks’ failure to earn the trust of the general population in addition to high fees.

The task force’s goal was to discuss potential solutions to barriers in providing relief money and benefits to underbanked communities. One of these solutions is the Digital Dollar, a tokenized and decentralized form of the US dollar. Giancarlo argued the digital dollar would not only be useful in serving underbanked communities, but would be essential to maintaining the value of the dollar.

“Today most of the world's tradable commodities and contracts are priced in US dollars, tomorrow they will be digitized, tokenized and coupled with algorithmically driven smart contracts. We must prepare to modernize the dollar from a simple analog instrument into a digitized unit of account,” Giancarlo said. “We must future proof the dollar today for that digital tomorrow.”

Photo: FamZoo Staff Via Flikr

Task force member Representative Tom Emmer raised privacy concerns surrounding a digital fiat currency. Citing China’s trial of a digital yuan which began in four cities last month. Representative Emmer claimed the digital yuan is a closed, centralized and surveilled token. He stated that the digital yuan allowed those in power to deny access and block payments and asked Giancarlo if a US central bank digital currency (CBDC) would work similarly. In response, Giancarlo emphasized the United States’ legacy of prioritizing privacy rights.

“If we do a CBDC right and bring to it those values I think an American CBDC could be the killer app compared to other sovereign CBDCs where there’s not the same expectation of privacy from government surveillance such as ones coming out from non-democracies,” Giancarlo said.

Other representatives raised concerns that in many underbanked, rural American communities there is limited access to broadband, which would prevent people from utilizing a digital dollar system. Giancarlo replied that while this would be a barrier, helping individuals gain access to smartphones could be a simpler solution than expanding bank branches.

Another concern regarded the potential for scammers to infiltrate a digital dollar system, which Giancarlo said would need to be combated by government enforcement agencies.

“As the technology moves on the fraudsters and the scammers move along with it and it’s critically important that regulatory agencies that have enforcement efforts and powers stay ahead of the technology so they can stay ahead of the next generation of scammers,” Giancarlo said.

In order for the Digital Dollar Project to become a reality, Giancarlo emphasized the need for pilot programs utilizing resources from both the public and private sector. However, Representative Warren Davidson raised concerns about the ability of the private sector to participate without regulation.

“I am concerned that our laws or more accurately our lack of laws and regulatory clarity within the digital asset space will hamper the innovation that needs to take place here in the United States,” Representative Hill stated.

To attempt to mend this issue, Representative Hill raised his bill the Token Taxonomy Act, which was introduced to the House in April 2019. The act specifies that digital tokens are not securities for regulatory purposes. He argued that the bill would allow industry leaders to know when securities law would apply to distributed ledger based projects.

 Photo: The United States Federal Reserve Building. DonkeyHotey via Flikr

The digital dollar’s competing solution was a FedAccounts proposal championed by Representative Morgan Ricks. FedAccounts are digital dollar accounts maintained by the Federal Reserve which are offered exclusively to large banks and government institutions. The accounts offer high interest rates and have full government banking regardless of balance size.

Representative Ricks explained that this means the Federal Reserve issues both paper dollars as an open access resource in addition to digital dollars which are only available to select subset of clients. 

“This creates a striking asymmetry at the core of our monetary framework and congress should do away with it,” Representative Ricks said. “Specifically Congress should direct the Fed to give the general public — including individuals, businesses and institutions — the option to hold digital dollar accounts at the central bank.”

These FedAccounts would work similarly to private bank accounts, but would operate without fees and could utilize postal offices to serve as built in bank branches.

Representative Ricks emphasized that the United States government cannot wait for the private sector to fill the gaps for underbanked communities and must take action.

By Emily Mason

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