Central bank digital payments

I broadly favor central-bank digital currencies, or CBDCs. Inspired by cryptographic “monies” like Bitcoin and stablecoins like USDC, governments should offer digital assets which are per se fiat money, rendering unnecessary fragile and corruptible mechanisms to redeem digital assets for cash. The main case against CBDC, argued for example by Stephen Cecchetti and Kim Schoenholtz, is from my perspective a feature rather than a bug. Disintermediation of commercial banks is desirable. Disintermediation would provoke replacement of retail deposits in bank capital structures with central bank lending facilities, breaking the deceptive political economy under which commercial banks are notionally private despite nearly all of their risk being borne by deposit-insuring, bail-out providing states. It is long past time we straightforwardly acknowledge that contemporary commercial banks are conduits through which public investment is delegated to (ideally) decentralized actors whose incentives are (ideally) commercial and apolitical, but which are ultimately agents of the state. If you are a banker and you think you are John Galt, you are just lying to yourself, as well as the rest of us. Jamie Dimon is just a poorly supervised public servant who’s fibbed his way into exemption from the General Services pay scale. For a discussion of some of the conceptual and implementation issues surrounding CBDCs, see Rohan Grey. (I use CBDC to mean open access, federally provided digital money, not to express a preference about whether the Federal Reserve should be the agency that manages it.)

More urgently than CBDC, however, I think we need a federally operated digital payments platform in the mold of Amazon Pay, Apple Pay, or Google Pay. A payments platform is distinct from the media by which payments are ultimately made, which might be a credit card, a debit card, a bank account, a stablecoin, or CBDC. A payments platform wraps payment media beneath a persistent customer identity, and adds related information like billing and frequent shipping addresses. Payments platforms are increasingly the digital reification of business-to-customer relationships. If you have an Amazon account, if you have set up Apple pay, you and those platforms have a persistent, resilient, nearly zero-friction means of consummating transactions on-line, and increasingly at physical points-of-sale. This gives Apple, Amazon, and Google a tremendous advantage over other businesses, because who wants to go through the trouble of entering credit card information and addresses, expiration dates and security codes, usually on a finicky mobile screen, just to make some dumb little purchase? Even with apps and businesses for which you do go to the trouble of entering all that crap yet again, even if you check “save for payment information for future use” on those apps, the shelf life of your relationship is short. A credit card expires or gets compromised or is lost, and the relationship is broken. You have to start over and may well never bother. Your Amazon or Apple Pay identities are persistent. They are often backed by multiple payment media, and when an underlying payment medium breaks, you do bother to repair it, because you can amortize the burden of data entry over the many businesses you’ll use the platform to pay. Your identity belongs to Apple and Amazon and Google, and is rented to other businesses, under terms the platform providers set. Businesses have little choice but to accept those terms. To conveniently pay from an iPhone, customers must rely on Apple Pay. When purchasing from small businesses on the Amazon marketplace, customers must use Amazon Pay. The platforms enjoy clear network effects: each payment system becomes more valuable to both customers and businesses the more customers and businesses are on them. The value of those networks is extracted in markups (charged opaquely to businesses, not visible to payers) by within-ecosystem monopolists, at the expense of transactors.

It’s easy to argue that these platforms should be broken up or regulated on antitrust grounds. Epic Games has filed antitrust lawsuits against both Apple and Google for the cuts those platforms take and their heavy-handed exclusion of other, cheaper payment channels. But sometimes when we think about antitrust we spend too much energy on the anti — on what in the status quo we want to undo or dismantle — and too little on what we’d like to create. Even when we win, often the result of clipping some bad practice is to create a power vacuum that some new not-so-great practice rushes to fill. Rather than just attack the problem, often it is best to construct a solution.

Businesses would prefer to independently own their customer relationships, but because the network value of payments platforms is real, it will be increasingly difficult for them to do so. There will be some large-scale intermediary that manages, and so potentially gates, those relationships. What we can do is ensure that there exists a fair payments platform, a platform that can’t discriminate against businesses without due process (as private payments providers assuredly do), which imposes no toll on transactions beyond the cost of managing and running the platform, and is conveniently available from all the digital ecosystems.

The simplest and least heavy-handed way to do this would be for the government to provide a public payments platform, which would set fees just sufficient to break even on operating costs. The Pays of Amazon, Google, and Apple could continue to exist. Those firms can surely innovate faster than the Federal government will. But the price premiums those innovations command will be limited by the option of using the public service, which, like the strange antagonist from It Follows, or like a textbook of market capitalism, will eventually catch up and compete down fees.

What we want is not just antitrust. We want free enterprise, a business ecosystem in which people can use their own minds, interests, and experience to explore wants in their communities not currently met, and then even from a very small scale, develop commercial solutions without incumbents extracting tolls or using advantages of bigness to eat their lunches. Network effects in payments are an economy of scale that should not be left to private providers.

Let’s just put FedPay on our smart phones and call it a day.

Update: Adam Levitin was prescient about this stuff in 2016. (ht @squarelyrooted)

Update History:

  • 11-Aug-2021, 6:05 p.m. EDT: Added bold update referencing Adam Levitin paper.
  • 14-Aug-2021, 1:05 p.m. EDT: Fix Rohan Grey’s name (which isn’t “Gray”). Sorry Rohan!

8 Responses to “Central bank digital payments”

  1. Lawrence D'Anna writes:

    The same government that could not build healthcare.gov is supposed to create FedPay? The government that could not build Virtual Case File is supposed to create FedPay?

    I cannot even imagine where you are coming from to think this could ever happen. You don’t have to be a wild-eyed acolyte of Murray Rothbard to realize that the feds are singularly bad at this kind of project. And FedPay is harder to build than healthcare.gov or VCF were.

  2. Sergej writes:

    Lawrence D’Anna, you seem to see socialists everywhere even denying the advantages of technology. Blockchain’s main purpose is to execute transactions in a most cost efficient and transparent way. I really do not understand why I need to pay to my bank every month some maintenance fee to maintain something that can be safely stored on a ledger and scaled enormously and additionally does not carry any risk, and by consequence, any costs of regulation.

  3. Zsx writes:

    Sergej, Lawrence D’Anna does not mention socialism in his post (though maybe you know him from elsewhere and are inferring something the rest of us cannot see?). I had the same reaction, more or less, when I reached Steve’s neologism “FedPay”. It not only sounds like something nobody who has any interest in cryptocurrency would ever sign up for—one of the main advantages/values/attractions is decentralization, which is also to some extent necessarily de-nationalization of exchange, it is also simply the case that the US government has for the past forty years or so largely and spectacularly failed at these sorts of projects. There are all kinds of reasons for these failures, but the fact of the failures themselves (two of which LD mentions) is, I think, uncontroversial.

    But really, what is the point of this article? Not to be rude, I am a regular reader and often find your ideas interesting (and I like your writing style), but here it seems you just sort of describe cryptopayment tools/potential as they already exist and then tack on the strange but admittedly unexpected innovation: hand it all over to the fed. What?! Why?!

  4. Steve Roth writes:

    Why even use the term “digital currency” here at all? I mean, everyone’s checking-account holdings are digital currency, right? I think the “CBDC” framing does nothing but derail what should be a far more straightforward conversation, fatally pollutes it with a mare’s nest of bottomless and unnecessary bitcoiny crap.

    This is just about government providing basic deposit and transfer accounts and services to all comers. Everyone has a debit card (aka account number) for their account. The accounting mechanics (standard central ledger vs blockchain ledger, etc. etc.) are a complete distraction and side issue.

    >government to provide a public payments platform, which would set fees just sufficient to break even on operating costs

    ?? Pay-for at time of service? Why should the government deposits/payments system charge fees at all? Just provide that fundamental utility as a public good. There’s no use-fee to use interstate highways (with a small number of exceptions).

    Building and running such a system would not be as simple as it sounds, of course. The rarely-mentioned issue of chargebacks in particular involves a very large institutional structure with lots of human intervention, bespoke communications, and judgment.

    So how about the U.S. government just buys and operates Paypal, largely for free? That’s not a silver bullet, of course. Need to set policies and practices as well. (eg, who can have an account? should commercial users pay a fee? Or only commercial entities, eg non-natural “persons”?) But a massive portion of the infrastructure and operational capability — including a whole chargeback infrastructure — is in place and has been working effectively for many years.

    One immediate, big-$ win: we could ditch the laughably archaic current small-transfer system, ACH. (Whose computers apparently refuse to work on weekends and holidays. What, are they unionized?)

    Another really big thing that again doesn’t get mentioned much or at all: A “run” on that “bank” would be impossible. If everybody decided to withdraw all their holdings in cash (not bloody likely, right?), the government’s just like, “Fine. Crank up the printing presses and relabel the so-called ‘liabilities’ on our balance sheet. Whadevuh.”

    Individual banks would whine of course, because the system would deprive them of deposits, which they perceive as a “cheap funding source” for lending. But I don’t have to tell you: that’s a standard-issue error of composition and coordination failure. The proper response to that is “STFU.”

  5. Detroit Dan writes:

    Good post, and I really like Steve Roth’s response. Further discussion and posts would be appreciated.

    Is it probable that China will be ahead of the U.S. in creating something of this sort? They seem to be able to take on the vested interests more effectively and move with the times. How about Russia? They have an incentive to get away from the U.S. dominant financial model.

  6. Erik writes:

    I’ve been looking for a solution along these lines to start getting behind. Creating currency has always been a government prerogative; the first government to do so will have a first-mover advantage towards becoming the currency of record for the next generation. But first-mover advantage isn’t everything, or BitCoin would already be there.

    Creating a trusted party for ultimate escrow is the key to being the currency of record the way the dollar is in this generation. While the blockchain is attempting to create that trusted party independent of governments, at this point after events like Mt. Gox it’s only trusted in a cryptographic sense, not in a cultural sense, and they continue not to understand how to rebuild that public trust. People may not like them, but there is no more trusted counterparty than the US Government to form a new digital currency. Yes, running a transaction registry as a public good will have costs; so does printing physical money, and we’ve never had a problem with that. If the US put forth any proposal in this space, that would immediately vault to the favored status for ultimate currency of record.

    But the USG aren’t doing anything, the EU is a reasonably close second in trust, China is less trusted but already moving, the cryptos are untrusted but already exist, so *shrug*. I dunno who wins if the US continues to stick their heads in the sand.

  7. Unanimous writes:

    The idea of mixed economy financial system functioned well in Australia between WW2 and around 1990. The federal government operated a commercial bank. Each state government also operated one. There were 6 or 7 banks listed on the stock exchange with national reach, and some smaller financial institutions.

    The non-government banks provided inovation in proucts and management expertise that the government banks needed to keep up with, and the government banks always limited their profits so their competition prevented the non-government banks from making outsized profits.

    Around 1990, in a fad of privatisation, the gornments sold their banks, and opened up the market to foreign banks. The encumbent non-government banks and sold government banks merged down to 4 and made mega profits while still wiping the floor with overseas banks trying to compete. These 4 banks are all in the top 10 on the stock exchange.

    Moral of the story is that governments competing with private sector can work better than a private sector alone in financial markets.

  8. Arthur Niculitcheff writes:

    I left a comment before but i think my call to check a link out felt too much like spam for the filter.

    Brazil’s Central Bank recently released a payment platform. It’s free and easy to use and each day more and more business are accepting payment through it, penetration seen pretty good all around, big formal business, small informal vendors, internet and physical ones. It’s called PIX, the central bank has some information about it in English, I’m not gonna link it but I’m sure it’s easy to google it.