Banking News

US Democrat bill for Covid-19 plans digital dollar for stimulus to unbanked

digital dollar covid19 coronavirus

Yesterday, the Democrats in the U.S. Congress published a draft bill for Covid-19 stimulus, which includes the introduction of a digital dollar or central bank digital currency (CBDC). 

Unveiling a raft of bills, Maxine Waters, Chair of the House Committee on Financial Services said: “Today, I am proud to lead my colleagues in releasing a package of more than 40 bills to implement this plan, including my legislation to provide up to $2,000 a month for most adults and $1,000 for each of their children during the pandemic.”

This follows the failure of a Republican bill to be passed through the Senate on two occasions, which is unsettling markets.

The draft Democrat Bill introduces the concept of a Digital Dollar, which represents either a liability of any Federal Reserve bank, or money redeemable at a bank. In the latter case, the bill introduces the concept of a pass-through digital dollar wallet, which is operated by a bank.

Update: another digital dollar bill was launched the next day, this time in the Senate.

A primary aim of the bill is to enable the distribution of funds during the Coronavirus Crisis. It specifically includes the unbanked and an absence of bank charges.

While former CFTC head Christopher Giancarlo has promoted the idea of the Digital Dollar, it remains to be seen if he supports it as part of the Coronavirus stimulus. So far, he has not commented.

Central banks have repeatedly noted that the creation of a digital currency is something that needs to be done with caution. Apart from economic risks, there are also very significant cybersecurity issues.

However, the bill involves the creation of an entirely new infrastructure at short notice. Every bank has to set up a separate company that will oversee these pass-through digital wallets. And billions of dollars would flow through this new unproven infrastructure.

At a time when people are in desperate need of funds, is this a quick and low-risk mechanism?

More to follow.

Excerpts from draft bill

(1) DIGITAL DOLLAR.—The term ‘‘digital dollar’’ shall mean—
(A) a balance expressed as a dollar value consisting of digital ledger entries that are recorded as liabilities in the accounts of any Federal reserve bank; or
(B) an electronic unit of value, redeemable by an eligible financial institution (as determined by the Board of Governors of the Federal Reserve System).

(2) DIGITAL DOLLAR WALLET.—The term ‘‘digital dollar wallet’’ shall mean a digital wallet or account, maintained by a Federal reserve bank on behalf of any person, that represents holdings in an electronic device or service that is used to store digital dollars that may be tied to a digital or physical identity.

(3) MEMBER BANK.—The term ‘‘member bank’’ means a member bank of the Board of Governors of
the Federal Reserve System.

(4) PASS-THROUGH DIGITAL DOLLAR WALLET.—The term ‘‘pass-through digital dollar wallet’’ means a digital wallet or account, maintained by a member bank on behalf of a qualified individual, where such qualified individual is entitled to a prorata share of a pooled reserve balance that the mem2 ber bank maintains at any Federal reserve bank.

Later the legislation covers method of delivery:

the Commissioner of the Internal Revenue Service, shall make the payments required under paragraph (1)—
(i) first, by direct deposit (including to a pass-through digital dollar wallet), if the Commissioner has sufficient information to make direct deposit payments to the applicable individual;
(ii) otherwise, by check.

MANDATE FOR MEMBER BANKS TO MAINTAIN PASS-THROUGH DIGITAL DOLLAR WALLETS.—


(1) OBLIGATIONS OF MEMBER BANKS.—
(A) IN GENERAL.—Member banks are hereby directed to establish and maintain pass through digital dollar wallets for all persons eligible to receive payments from the United States pursuant to this Act who elect to deposit such payments into a pass-through digital dollar wallet.

(B) SEPARATE ENTITY.—
(i) IN GENERAL.—Each member bank shall establish and maintain a separate legal entity for the exclusive purpose of holding all assets and maintaining all liabilities associated with pass-through digital dollar wallets.
(ii) ASSETS.—The assets of any entity described in this paragraph shall consist exclusively of a balance maintained in a master account at a Federal reserve bank, and the liabilities or obligations of the entity shall consist exclusively of an equal quantity of balances maintained by holders of pass-through digital dollar wallets.
(iii) SEPARATE ASSETS AND LIABILITIES.—The assets and liabilities of any legal entity described in this paragraph shall not be deemed assets or liabilities of the member bank or its affiliates for purposes of any capital or liquidity regulation promulgated by Federal or State banking authorities.

(C) APPLICATION.—Member banks with total consolidated assets in excess of $10,000,000,000 shall promptly offer individuals the ability to apply, through online or telephonic means, for a pass-through digital dollar wallets

(2) TERMS.—Member banks shall ensure that a pass-through digital dollar wallet established under this section—
(A) may not be subject to any account fees, minimum balances, or maximum balances;

(B) shall pay interest at a rate not below the greater of—
(i) the rate of interest on required reserves; and
(ii) the rate of interest on excess reserves;

(C) shall provide functionality and service levels not less favorable than those that the member bank offers for its existing transaction accounts (including with respect to access to debit cards and automated teller machines, online account access, automatic bill-pay and mobile banking services, customer service, and such other services as the Board determines), except that pass-through digital dollar wallet shall not include overdraft coverage;

(D) shall be prominently branded in all account statements, marketing materials, and other communications of the member bank as a ‘‘pass-through FedAccount’’ maintained by the member bank on behalf of the Board of Governors of the Federal Reserve System;

(E) may not be closed or restricted by the member bank on the basis of profitability considerations; and

(F) shall provide holders with reasonable protection against losses caused by fraud or security breaches.


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