What is the future of money?
Today, a third of the world is quarantined. Many are out of work and reliant on government stimulus to survive. Yet, our financial system is slow, expensive, and economically inefficient.
In the future, our financial system will be fast, cheap, and economically efficient. Sending money will be as fast and cheap as sending a text message.
Most importantly, money will be programmable.
Similar to how you can restrict access to files you share with others, money will be programmed with restrictions used to stimulate the economy.
Instead of spending stimulus checks on Bitcoin and Kylie Jenner's latest cosmetic line, digital stimulus packages will be restricted so they can only be spent at local businesses in need.
Others save stimulus checks out of fear that the economy won't recover anytime soon. However, this creates a self-fulfilling prophecy since the economy can't grow if people aren't spending.
In the future, digital stimulus packages will be programmed so they must be spent in a certain amount of time or else they will depreciate.
Sound extreme? Well, it is.
Extreme times call for extreme measures. The world today is at war. Not with each other. With ourselves. We are at war with a future where we continue on the same slow, expensive, and economically inefficient trajectory.
Instead, we should begin to examine assumptions about how the world is supposed to work. These assumptions were probably created in a world that no longer exists.
In this post, we will explore assumptions about our financial system and try to come up with solutions given what we know today. All of the proposed solutions in this post require a much more rigorous risk analysis. However, it's time we at least start thinking about modern solutions for a modern world.
Our future depends on it.
When Money is Received
There are three levers that can be improved when thinking about the economic efficiency of stimulus packages for consumers:
- When it is received
- Where it is spent
- How often it is spent
In this section, we will look at improving when money is received. We will focus on the United States throughout the post.
So, how are stimulus packages received by consumers today? One way is through direct deposit.
However, it's slow and expensive. It takes anywhere from days to weeks for a direct deposit to clear. This is unacceptable in times of crisis. Additionally, it could cost up to $360 million in tax payer funds.
These funds would be better used for education, healthcare, or cleaning up human feces in the streets of San Francisco.
Moreover, what about the 55 million Americans without a bank account? Instead of direct deposit, they could receive a check or pre-paid card. But this can take weeks or months which could be the difference between shelter and homelessness for some of the unbanked.
Instead, what if the US had a real-time payment and settlement service? Recipients could receive funds to a digital wallet on their phone in seconds or minutes. Better yet, it would cost less than a penny for each recipient which would lead to just $3 million in total transaction costs.
The technology has been around for years. China, The United Kingdom, India, Mexico, Poland, and South Africa all have real-time payment systems.
Why doesn't the US?
The main barrier has been regulation. The Federal Reserve is the regulatory body responsible for setting witholding times for payments.
Until recently, they were reluctant to mandate a real-time payment system because they operate their own payment system, ACH, which doesn't run on real-time.
However, they've announced plans to launch a "round-the-clock real-time payment and settlement service" by 2024.
Over the long-term, I believe a blockchain (e.g., Ethereum, Celo, or something else entirely) that supports stable currencies will be the primary way to facilitate real-time payments in times of crisis.
Instead of a payment system being restricted to a particular jurisdiction, payment blockchains will enable payments that are global, instant, and secure.
In a global blockchain-based monetary system, different countries could compete to offer the lowest cost of capital for stimulus packages. This would make it more likely that people get the best deal possible.
Additionally, a global blockchain-based monetary system would be free from central authorities in corrupt countries that overinflate their money supply, seize assets, or offer onerous financial terms.
Most importantly, a payment blockchain would be programmable.
For example, an organization could raise funds, store it on the blockchain, and automatically send the funds to people who qualify if the stock market goes down by a certain percentage.
Instead, we wait weeks for bipartisan representatives to put their differences aside and agree on stimulus packages.
Unfortunately, payment blockchains will take some time to develop since there are still open questions around scalability, identity verification, and governance.
Yet, it provides a completely new paradigm for how societies coordinate on a global scale.
Now that we've looked at different approaches for improving how money could be received in times of crisis, let's look at improving where money is spent.
Where Money is Spent
On April 14th, stimulus funds began to clear for millions of Americans. CEO of Coinbase (a digital currency exchange which most people use for buying Bitcoin) tweeted that almost 40% of purchases on that day were exactly $1,200 - the size of the stimulus checks
Others spent their stimulus checks on dildos, inflatable dinosaurs, and Yeezy's.
In periods of economic growth, buying unproductive assets is okay since it raises living standards. However, in times of crisis, most money should be directed towards productive assets to drive economic growth.
One potential solution could be to have merchants to sign up for a digital wallet for receiving payments.
After going through a verification process, a centralized authority (like the government) or a decentralized system could whitelist merchants in need like retailers, restaurants, and grocery stores.
A percentage of digital stimulus funds would be required to be spent at these whitelisted merchants to ensure the funds are being used productively.
Additionally, merchants could easily offer a digital coupon program where consumers pay $100 for a $110 coupon to be used in the future.
This would provide merchants with liquidity in times of crisis.
Some challenging questions here include:
- How do you verify merchants are who they say they are?
- Who decides which merchants get whitelisted?
- What % of the digital stimulus package should be required to be spent at whitelisted merchants?
- How do you ensure this type of system doesn't become too authoritarian?
Now that we've looked at improving where money is spent in times of crisis, let's look at improving how quickly money is spent.
How Often Money Is Spent
Injecting money into the financial system has been the primary method of economic stimulus in the past two crises. However, in the '08 financial crisis, the economy grew at a much slower rate than economic models suggested.
Economic models assumed that consumers would spend money at a similar rate they had been pre-crisis.
Instead, many Americans saved their stimulus funds which caused an ensuing economic malaise.
How often money is spent is known as the velocity of money.
So, how can we increase the velocity of money?
With digital currencies, we could program the funds to depreciate over time.
For example, if you give Alice $100, she has one month to spend it, or else it will begin depreciating by 0.1% every day after that.
This would incentivize consumers to spend money instead of hoarding it which could help drive economic growth.
Another option could be for merchants to provide special cash-back programs during a crisis.
For example, if a customer pays a certain amount at local businesses each month, they'll automatically receive a rebate to their digital wallet from the merchant or the government.
As we've seen, digital currencies, blockchains, and smart contracts provide extreme levels of flexibility. However, in the wrong hands, this could quickly turn into an Orwellian nightmare.
In a future post, I will go over some of the tradeoffs between the current financial system vs. programmable digital currencies as well as centralized vs. decentralized systems.
Many of the technologies in this post are in use, have been developed, or are being developed.
Given that, the hardest problems we will face in the future won't be technological. Rather, the toughest problems will be around social coordination issues like human rights, economic incentives, and governance.
Most ideas shouldn't be implemented. Yet, thinking through potential solutions allows you to see the world clearer today, and create a better tomorrow.
In the end, that's all we can really hope for.