Completed by Pye Eshraghian/Agtools
March 18th, 2022
The US Federal Reserve is looking at the pros and cons of releasing a central bank digital currency, or CBDC, for domestic payments.
The Fed is seeking public comment on issues it details in a discussion paper. The paper's release was delayed from summer 2021.
The Fed has not outlined its position on the idea of releasing a CBDC but says in the report that if one were created, it "would best serve the needs of the United States by being privacy-protected, intermediated, widely transferable, and identity-verified."
Unlike cash, a generally available CBDC would be a Federal Reserve liability rather than one of commercial banks, which fund loans through deposits. A CBDC, for example, could reduce deposits at commercial banks, making credit and loans more scarce and expensive.
"A CBDC could fundamentally change the structure of the U.S. financial system, altering the roles and responsibilities of the private sector and the central bank," the Fed notes.
Name or Organization: Agtools Inc.
Industry: Commodities Supply Chain SaaS
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CBDC Benefits, Risks, and Policy Considerations
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What additional potential benefits, policy considerations, or risks of a CBDC may exist that have not been raised in this paper?
In commercial value chains, agribusinesses and cooperatives buy crops from smallholder farmers, relying heavily on cash payments for procurement. Although some digital subsidy schemes have emerged over the past decade, most governments still tend to distribute subsidies through traditional mechanisms, such as vouchers for fertilizer or seed.
There are 450 to 500 million smallholder farmer households worldwide, comprising around 50% of the labor force in developing countries. Most smallholder farmers who live in rural areas are still likely to be unbanked or have limited access to formal financial services, let alone to cutting edge digital payment systems and currencies. Across Latin America and the Caribbean in 2017, 47.4% of rural residents were considered as “financially excluded” vis-à-vis evolving non-cash payment systems. Within the US, a 2017 FDIC household survey showed that 25.2% of households are either unbanked or underbanked, conducting some or all their financial transactions outside of the mainstream banking system. Many of these households rely on alternative financial services (AFS) providers, while others use cash or other financial arrangements. They remain so in part due to habit, but also due to trust issues.
The core question of technological expertise – as it’d presumably originate from within government agencies, bureaus or institutions alone – weighs on the effectiveness of a formal CBDC issuance versus that of, say, digital or cryptocurrency innovations which have already been developed in the private sector, and for years now since Bitcoin’s introduction fourteen years ago.
Related is the issue of scaling and adoption of a new issuance versus ‘network effects’ already achieved by existing private issuances like Bitcoin, foremost, and other popular offerings after it. I.E., a Fed-issued CBDC would require quite some time and systemic ‘trust efforts’ for wider adoption which, under a presumed technological glitch, would buckle said trust and cause mass reversion back to cash, fiat, existing cryptocurrency alternatives and precious metals for core value retention.
Could some or all of the potential benefits of a CBDC be better achieved in a different way?
Ideally, the core, traditional feature of “money” has involved definitive, demonstrable scarcity factor which is tangible to both users and issuers. Whether via physical precious metals or a gold or silver standard(s), said scarcity factor has provided perennial discipline against currency debasement which then have historically and universally resulted in political dysfunctions. Were a CBDC offering to return to a tangible precious metals (I.E., gold, silver, platinum, palladium, or even industrial metals) linkage – and thus away from purely fiat currency standards - while then offering unprecedented digital usage and transmission efficiencies, then all expected benefits of “money” would be established. Or re-established, as it were.
Could a CBDC affect financial inclusion? Would the net effect be positive or negative for inclusion?
From the additional perspectives of farmers and smallholder agriculture sector workers, and especially considering the current wider economic conditions experienced, said aspect of inclusion via CBDCs would be assisted greatly through government’s combination of regulatory ease and marriage to private sector innovation regarding the future provisions of subsidies, grants and income support payments. Said public sector fiscal staples would further stimulate the use of inputs that enhance agricultural productivity, support smallholder livelihoods and provide a safety net for farmers and their ancillary stakeholders. Said subsidies are often intended for specific inputs such as fertilizers, seeds or pesticides. Such subsidies support farmers by improving access to inputs while encouraging the incremental use of inputs by farmers who might not otherwise use them and improving farmers’ knowledge of effective input use. And yet, said subsidies do not reach the farmers that need them the most. Subsidy schemes can be prone to fraud and corruption, are costly to administer and may unintentionally benefit wealthier farming constituents to the detriment of smaller operators and their staff. For example, fraud can occur if subsidy vouchers are easy to counterfeit or if there are “ghost recipients”. An efficiently designed CBDC system with vested stakes in agrarian, low income and food grower milieus can thus potentially tackle the challenges of reducing fraud and the costs required to distribute subsidies to farmers. To date, little to no digital government-to-person (G2P) payment platforms have been offered to resolve said issues, but the opportunity space is clearly open for the public sector to focus on. Per the GSMA in England, the revenue opportunity in digitizing G2P payments in agriculture is expected to reach $210 million by 2025 through digitizing G2P payments to smallholder farmers. Yet to realize this opportunity, private mobile money providers will require assistance from helpful public regulatory climates while having necessary assets in place, such as assistance agents in adequate numbers and liquidity available in rural areas. Conscientious CBDC design must encompass such wider positive ecosphere impacts and work toward them.
Otherwise, away from immediately beneficial aspects specific to stated commercial sector needs, the perceived net effect would be negative because of critically underrated fiscal aspects involving privacy, ultimately. The “Money and Payments” paper issued by the Federal Reserve states that 5% of US households were unbanked and that almost 20% had a bank account but used more expensive financial services such as money orders, check-cashing services, and payday loans. It can be argued that many of said services allow countless citizens to essentially retain their transactions in a more private manner - especially when physical cash is used - than they could through a federally issued, and thus controlled, digital currency would, especially considering its presumed technological capabilities for tracking, tracing, auditing, taxing and even sanctioning.
How might a U.S. CBDC affect the Federal Reserve’s ability to effectively implement monetary policy in the pursuit of its maximum-employment and price-stability goals?
Some say that a CBDC, due simply to its eventual technical scale and scope, would ultimately render the need for commercial banks as ‘moot’, considering that the federal government would essentially be creating – and issuing - all legal tender and currency. Under such auspices, there would be an intolerable monopoly power over the granting of consumer or even corporate lending, as vetting and credit approval criteria would be subject to increasingly opaque means divorced from requisite personalized protocols deployed by local banks, credit unions and even large private banks.
Said monopoly power over currency issuance would further warp market forces away from organic price discovery mechanisms, thereby harming established price-stability goals. Markets would simply morph into ‘executive interventions,’ even on federal administrative ‘whims,’ thereby clouding genuine supply and demand factors influencing price assignments to goods and services.
Thus, any CBDC innovation must retain a layered technological architecture which allows for the separation of programmability of payments from CBDC issuances and custody. The ideally risk-free currency collateral of a nation’s payment system must not miscegenate with the IOU functions of currency as are currently administered by commercial banks and other licensed private enterprises.
How could a CBDC affect financial stability? Would the net effect be positive or negative for stability?
As CBDCs are currently described, they would – again – be net negative for stability because
the specter of one central planning entity defining, then issuing, lending, tracking, taxing and then civically spending one form of “money” brings up images of the failed Soviet project of the 20th Century, which sought said aims to deleterious final systematic effects.
Could a CBDC adversely affect the financial sector? How might a CBDC affect the financial sector differently from stablecoins or other nonbank money?
As mentioned, wanton, unlimited money printing warps price discovery and genuine market forces. Just the collective national experience since the 2008 Financial Crisis provides a critical case study in how the Fed’s market interventions – to the tune of trillions of dollars infused into the economy via Quantitative Easing and other stimulus measures – have skewed private market valuations and governmental budgetary considerations into unrecognizable data territories. This has all been due to constant currency devaluation through trillions of dollars having been printed, first from 2007 through 2019, then as a response to the Covid Pandemic.
Whether through a federally issued CBDC, or from a hybrid public/private collaboration involving stablecoins, “fixed coins” or the like, there needs to be a return to “Sound Money” principles which for millennia have involved the resilience of hard asset currency standards involving finite physical metals. The digital means should then only and essentially serve efficiency and convenience aims of issuance, circulation and usage, rather than usurp numeraire characteristics.
What tools could be considered to mitigate any adverse impact of CBDC on the financial sector? Would some of these tools diminish the potential benefits of a CBDC?
Again, the Federal Reserve should seriously consider core monetary and fiscal ‘anchoring’ benefits of re-attaching legal tender to a metallic standard to reign in runaway inflation across financial markets which have existed for years, and at this point, seemingly irreversible inflation plaguing goods, services, agricultural commodities, supply chain resilience and household net worth bottom lines. Rather than ‘diminishing the potential benefits of a CBDC,’ such a vital monetary action would underpin the solvency and thus the trust in a national currency’s resurrection from runaway printing’s harmful effects over many decades.
If cash usage declines, is it important to preserve the general public’s access to a form of central bank money that can be used widely for payments?
One must first ask how and why physical cash usage and reliance would decline significantly, short of government mandates against its continued uses. The government experiment in India and South Asia several years ago in quelling large bill issuance resulted in mass riots, which should’ve served as a lesson in how not to interfere with traditional money usage, especially across rural and agrarian populations.
That said, and regardless, assuming a tactical drawing down of cash printing, issuance and circulation by the federal government, then yes, it is vital to preserve the public’s access to legal tender, and ultimately via jurisprudential guarantees against unconstitutional usurpation of access to said money.
How might domestic and cross-border digital payments evolve in the absence of a U.S. CBDC?
They’ve already been evolving. There is close to $150 billion in global daily cryptocurrency turnover, which translates into something like a $54 trillion annual run rate. More US Dollars are entering world markets annually, yet fewer actual dollars are being used in trade settlements, which then presumably speaks to rising reliance upon Bitcoin and its ilk for executed trading. Given that, one must then ask how government issued CBDCs intend upon ‘competing’ sans some sort of digital sanctioning and replacement mechanism being enforced en masse across international commerce.
How should decisions by other large economy nations to issue CBDCs influence the decision whether the United States should do so?
Within the global farming community, the question needs to be adjusted down from “large economy nations” and “CBDC” to illustrate already existing benefits harvested from digital agricultural payment services. I.E. in Ghana, the privately held telecoms firm MTN Ghana launched a mobile app that enables agribusinesses to record crop procurement from farmers digitally and pay farmers for their produce instantly via mobile money. In Rwanda, and through the same firm, MTN, digitizing payments has had many early benefits for farmers including fewer payment delays, reduced travel times to collection centers and lower travel costs to banks proximate to farming operations. In Pakistan, a digital payment solution improved the traceability of milk collection and logistics for private firms while farmers were able to receive payments securely without delays. Said service is being expanded to other agricultural value chains.
Again, not “large economy nations”, nor even continental regions, for that matter, and yet useful digital payment solutions – clearly enabled by varying government structures – are assisting diversified food service sectors. CBDC considerations domestically should subsequently heed ‘emerging economy’ advancements regarding both technical and policy designs.
With regard to large economy nations, however, and in a much wider macroeconomic sense, the US should heed conspicuous demand abroad for evolving beyond the staid, overextended 78-year-old Bretton Woods Agreement-established decree for the USD as reserve currency standard. That nations such as Canada, France, El Salvador, Saudi Arabia, China, Russia and some 75 other nations are either exploring, developing or fully piloting their own CBDCs … is a testament to the perceived need to move beyond decades-old mores, as well as to the need for grounding money away from opaquely speculative policy decisions where resulting inflation is then exported to said nations.
Washington should thus seek to collaborate both technologically and policy-wise with other large economy nations in arriving at a ‘Digital Post-Bretton Woods’ monetary ‘secure landing’ so as to prevent conditional extremes ranging from continuing deflation to stagflation to outright hyperinflation resulting from experimental monetary policies based on said obsolete post-war standards.
Are there additional ways to manage potential risks associated with CBDC that were not raised in this paper?
Per the stated recommendations of the USAID’s May 2019 Feed the Future report itself, digital financial services (DFS) for agriculture in general will require “long term, market building investments”. Such endeavors include subsidizing risk and innovations, in both the private and public sector, in order to drive growers’, enterprise users and consumers’ adoptions of digital currency-based commerce. Strategic partnerships must be formed between government and leading private innovators so as to solve complex problems, including making regular savings, insurance and credit access increasingly relevant to farmer’s goals. Those elements are, naturally, in addition – if not causal to – ‘simply’ providing supposedly easier payment and transaction experiences.
As mentioned, tying CBDC developments – both technologically as well as policy-wise – ideally to physical, finite, measurable and ultimately auditable commodities would reduce international concerns over currency debasement, inflation and fiat policy decrees deemed to reduce individual and collective liberties. By doing so, physical labor and wider human energy exertion can then be better measured through sound currencies which, in a new digital epoch, would be securely and easily used by anyone on earth.
How could a CBDC provide privacy to consumers without providing complete anonymity and facilitating illicit financial activity?
The key question involves which technology would enable genuine encryption and “decentralization” so as to put farmer privacy concerns at ease while enabling better ease of use through envisioned FinTech solutions. From our industry’s perspectives, past private sector digital payment proposals for creating farmer user and economic identities, farmer credit scores through financial service providers (FSPs) and building up financial footprints through digital histories … have – again – been frowned upon by grower communities, and near-universally. Convincing them that payment systems can be both cheaper and more secure than cash usage has proven to be very difficult. Additionally, traceability, auditability, credit score assignments and user fee aspects worsen such perceptions, often to the point where they’re considered worse than actual cash theft risks by farmers. I.E. Why should farmers pay fees to mobile providers, or countenance government digital intrusions for payment transactions, when physical, anonymity-synonymous cash will do for most of their needs?
So, achieving usage standards without any glitches, educating on full confidence-backing security measures of government, and enabling user experience add-ons into services like credit streamlining, microinsurance and government subsidy incentives, would help alleviate such negative perceptions while actually providing tangible benefits and services. Reassuring agricultural stakeholders regarding both privacy and comfortable use for their routine last mile of food-related value chain reliance would provide a case study for any other presumed CBDC user base – again, because of existing resistances in our community.
Otherwise, without such wholehearted assurances, what is asked with this question is just about near impossible to achieve credibly and practically. True anonymity, by definition, is sacrificed with any mandated digital currency standard simply by the definitive nature of its programmed, automated, cyber-connectivity. Therefore, the noble policy intentions involving wiping out illicit financial activity will always run up against the risks of compromising privacy.
How could a CBDC be designed to foster operational and cyber resiliency? What operational or cyber risks might be unavoidable?
To the extent that prominent private cryptocurrency developments have already developed, tested and deployed cybersecurity measures for usage and trading of their tokens, coins and products, the Fed should engage – if it hasn’t already – leading startups and other entities which have labored toward standard setting in this domain. I.E. Firms such as Ripple, for instance, which invested in a leading London-based biometric security firm two and a half years ago. The private marketplace tends to excel efficiently at expediting technical solutions to critical needs.
That said, potentially unavoidable cyber risks include the ‘macro-concern’ of the supposed ‘unhackability’ of the Blockchain itself finding holes in its argument. Eight months ago, no less an authority than the MIT Technology Review reported that “hackers had gotten away with nearly $2 billion worth of cryptocurrency since 2017 by attacking the unique vulnerabilities of blockchains.” If that was achieved against entities in the private sector, and during the still-speculative uptrends in adoption of cryptocurrencies, then very serious considerations must be weighed against such breaches occurring against government-established CBDCs which could result in buckled commerce entirely.
Should a CBDC be legal tender?
As CBDCs are currently described – and whether via the Fed’s cited paper or even by academic, private sector or foreign theorists - No. Again, there are too many risk factors to promptly sanction a CBDC as legal tender. Rather, we believe that a measured, staged process of arriving at legal tender status – and only after sweeping concerns over security, privacy, transparency (of design, issuance and regulation), feasibility, practicality, environmental sustainability and frankly, solvency, are fully explicated by the government.
To reiterate, were CBDCs to not be tied to tangible commodities with regard to valuation and meaning, then a Fed-issued CBDC would simply be a digital reprise of the fiat experiments of the past 50 years since the closing of the gold window on 15th August 1971. There would be the high risk of a lack of accountability to natural laws of scarcity, which grant money its core meaning as numeraire and as a base store of value for human energy and endeavor.
Should a CBDC pay interest? If so, why and how? If not, why not?
CBDCs should not pay interest, as currencies, by definition, are not and should not be interest-bearing. Money should remain as it has been for millennia – a medium of exchange, unit of account and a store of value. Interest-paying or bearing connotes a bank account or other vehicle into which said money is deposited, with separate institutions administering and storing such an account. To propose an interest-bearing CBDC is therefore, in essence, to propose – indirectly or otherwise – that banks and other financial institutions are to be deemed increasingly as redundant phenomena, needing to be replaced in favor of direct government administration of individual and enterprise-level capital needs.
Should the amount of CBDC held by a single end-user be subject to quantity limits?
Simple the proposal of “quantity limits” on single end-user CBDC usage or reliance arrests even the conception, let alone promise, of free enterprise within a free society. Subsequently, any serious consideration of said limits functionally invites a ‘slippery slope’ definition of how and where such limits could, let alone should, be exercised, and by whom or what.
What types of firms should serve as intermediaries for CBDC? What should be the role and regulatory structure for these intermediaries?
With regard, again, to our core agricultural customers and stakeholders, Mobile Money Providers should be seriously considered as a key potential CBDC intermediary, as they have the opportunity to drive growth in rural areas by digitizing agricultural payments and other services. Generally, the revenue opportunity for mobile money providers from digital Business-to-person (B2P) payments is expected to increase from $2.4 billion in 2021 to $3.2 billion in 2025 while the revenue opportunity for digitizing government-to-person (G2P) payments is expected to rise from $152 million in 2021 to $210 million in 2025. Within agriculture, two types of payments are ripe for digitization: procurement payments from agribusinesses to smallholder farmers in formal value chains and subsidies paid out by governments to smallholder farmers. Both offer mobile money providers an entry point to digitize agricultural payments and enhance financial inclusion for smallholder farmers.
An over-riding CBDC platform would then further expedite their innovations while enhancing their user penetration and access. Yet doing so without payment transaction fees while providing ironclad privacy guarantees would raise confidence levels across said underbanked communities to start relying further on non-cash means. Also, the CBDC system should allow for bolt-ons which seamlessly allow for sector-specific features such as bulk payments and real-time payment tools for agribusinesses to pay farmers while enabling agritech entities, regulators and others to integrate real-time payments as part of a holistic digital agricultural tool. The CBDC’s ultimate issuer(s) should also lobby for adequate user education on the benefits of digital payments and the uses of mobile money systems, enable trained agents for educating and supporting newer mobile money users within sectors like farming, and in the wider technological connectivity context, solidify adequate mobile network coverage across rural regions containing farmers, their families and ancillary services. Lastly, providing the technology to disburse large eventual subsidy schemes to growers and rural residents along with digital platforms for managing government-to-person (G2P) payment systems in general between persons and government – while ensuring regulatory transparency, regular communication and community involvement – will further close the trust divide.
Ultimately, said types of firms should include a consortium / combination specializing in both 1) the procurement, measurement and commercial provision of physical commodities (I.E. precious and industrial metals, agricultural and manufacturing commodities, et al.), and 2) the apex of private, progressive cybersecurity innovations.
Said firms – corralled into public sector mandates beholden to Constitutional laws afforded to the sanctity of state-issued money - should be tasked with replete independence in regulating, monitoring and routinely vetting all compositional and operational aspects of hypothetical CBDC deployment, whether in trial runs within limited populations, or as full-fledged legal tender.
Should a CBDC have "offline" capabilities? If so, how might that be achieved?
Yes, CBDCs should have “offline capabilities” ideally through a well-established national voucher system which allows for the redeemability of legal tender currency against the aforementioned tangible commodity criteria. I.E. should there by system-wide breakdowns – or even takedowns – of electrical or power grids, or of the internet, or of an eventual blockchain technical infrastructure, then any and all touted benefits of CBDCs are rendered moot due to the inability to trade digitally. Citizens and corporations would then need to ‘resort back to’ barter, or to commodity or metals-based trading. Rigorously arrived at and available contingencies could be built into grid security and wider legal considerations for an elegant transference and citation capability for the use of gold, silver or other commodities – against other defined collateral – as means for citizens or entities to be able to trade “offline.”
Should a CBDC be designed to maximize ease of use and acceptance at the point of sale? If so, how?
Yes, and said maximization considerations have been integral ‘selling points’ to CBDCs – and to private cryptocurrency developments preceding them. No fees, no glitches or slowing down of commercial usage due to feature limitations emanating from applications, device constraints or other medium-functioning technologies. CBDCs should then ideally ‘mimic’ cash convenience yet at a fraction of the time required, and without getting one’s hands dirty. That said, and again, the ease-of-use factors must accompany critical security factors against both any likelihood of either hacking, or of wanton sanctioning, risks against the holders of CBDCs.
How could a CBDC be designed to achieve transferability across multiple payment platforms? Would new technology or technical standards be needed?
Said new technology and technical standards are already being worked on, again, courtesy of private sector FinTech developments. I.E. Ripple is connected to multiple digital transferability firms and the SEC – despite (or maybe as part of) its lawsuit – is studying their effectiveness. Coupled with transferability breakthroughs achieved elsewhere between current crypto exchanges and trading platforms, the government can, at some point, simply adopt best-in-class transferability standards, just as it has any prior technology. Presumably, the government would do so after surveying such tools for equity in application and free from abilities to be compromised which, too, would result from private marketplace momentum.
How might future technological innovations affect design and policy choices related to CBDC?
Future tech innovations would already achieve much of the ‘heavy lifting’ for the government’s CBDC efforts in the way of arriving at standards for cybersecurity, ease of use, transparency, transferability and value sanctity resulting from arrived-at demand amongst users. Trends, mores, trials and fixes reached through ‘wiki’ reliance on cryptocurrency usage in the marketplace would serve up ready-made practicums for policy implementation at the eventual federal level.
Are there additional design principles that should be considered? Are there tradeoffs around any of the identified design principles, especially in trying to achieve the potential benefits of a CBDC?
To reiterate - and away from acute technological design minutiae - the key, critical design principal of arriving at a CBDC which is both mechanically elegant and sanctified with regard to sound money fundamentals necessitates a returning to, and dependency upon, non-digital, tangible assets, however ironic that may appear to regulators, central bankers or government leaders. Such assets are best defined as those which require human labor in sourcing, mining, harvesting, procuring and consuming. By re-attaching money soundly to human labor through such commodity assets, the system’s budgetary crises recede and equanimity in the tradeoff between work, remuneration, risk, reward, savings and investment is restored to the macroeconomy, domestically and abroad.
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