Digital Yuan ends Helicopter Money, CBDC Helps the Little Guy, DeFi meets TradFi, Going Cashless and CBDC Programmability
The digital dollar will help the "little guy" does the Fed care?
This week:
1. Digital yuan ends helicopter money
2. CBDC helps the “little guy”
3. DeFi meets TradFi in Singapore (Special Article)
4. We’re going “Cashless” faster than you think!
5. CBDC policy, technology & programmability
1. Digital Yuan ends Helicopter Money
The first use of the digital yuan for economic stimulus purposes in Shenzhen and Xiong’an shows just how useful CBDC can be!
So how should governments give away money? CBDCs are changing how gov't delivers stimulus from the concept of “helicopter money” to something far more targeted.
News out of China shows how local governments in Shenzhen and Xiong’an are using the e-CNY to deliver stimulus that is 100% effective at stimulating spending. While the amount of stimulus in Shenzhen may seem small, 30 million yuan ($4.5 million) and 50 million in Xiong’an, it is highly efficient and targeted!
The cash giveaway worked like this: (China Daily here: https://bit.ly/3PRr1Uw)
"Consumers in Shenzhen could log on to the Meituan App and sign up for a raffle starting at 10 am on May 30, with winners obtaining e-CNY to spend on more than 15,000 offline e-CNY pilot merchants and the Meituan platform. The exact amount of money given away was not reported."
More than meets the eye
1️⃣ The first thing to understand is that there is more here than meets the eye to these giveaways because the gifts are tied to e-commerce. This is not money that can be saved, instead, it has to be spent and offers shoppers a discount to help get them consuming again.
2️⃣ There is also a multiplier effect in that for every 100 rmb given away another 500 rmb is actually spent on the platform. People don't just buy the amount of the gift but spend far more!
3️⃣ The multiplier of 5X is what makes this so interesting! The gov’t is getting a good deal on its $4.5 mn! From a prior giveaway in 2020: Hang Seng Bank (China) chief economist: “A back-of-the-envelope calculation would suggest that this 10-million-yuan program will generate at least 50 million yuan in total demand.”
4️⃣ As a comparison think about traditional stimulus which can be rerouted to savings and has no guarantee of being cycled within the economy. It also has high administration costs to send the checks. The gov’t has to spend more and has no guarantee that the money will stimulate anything! Think about the US's $5 tn spent on covid stimulus!
5️⃣ The economist in the article nails it: “Previously, when the government issued subsidies, there could be certain obstacles before the money reaches the recipients. "With e-CNY, the cash directly lands into your hands."
Multiplier effect
This is cash that will immediately enter the system assisting the entire retail sector which has been hit hard. If we think in terms of a multiplier or 5x spending above the amount gifted we’re looking at an impact of roughly $23 million in sales.
How does this compare with the US experience with helicopter money? According to the National Bureau of Economic Research: “US households report spending approximately 40 percent of their stimulus checks, on average, with about 30 percent saved and another 30 percent used to pay down debt. This means that nearly 60% of the money didn’t stimulate. Savings do not stimulate the economy and while debt paydown may, it often occurs at a later date.
I get that the lockdowns cost China many billions and that this giveaway won’t have much effect, yet still, it's giving us a clear signal on how effective CBDCs can be!
The digital yuan and CBDC should sound a lot more compelling!
2. CBDC helps the “little guy”
I am tired of hearing that CBDCs are “a solution looking for a problem.” For once the Fed should listen to the “little guy” like your local gas station to understand the problem with the credit card duopoly.
Hey Fed, still looking for a problem to solve? How about this one. Collectively, U.S. merchants paid $138 billion in fees to accept card payments last year (2021). That was a huge jump from the $110 billion that merchants paid in 2020. In separate calculations payment costs are 2.1% of US GDP.
Gas Stations are “the little guy”
The NACS is the trade association representing convenience stores and gas stations across America and their response to the Fed about the digital dollar project is simply astounding! Download: Here
I encourage you to read their response and the MUST READ attached testimony to the US Senate on credit cards.
This is the first document I’ve read that looks at the US's payment systems from the perspective of the “little guy.” It also shows the dirty tricks card companies use in the most comprehensive way I have ever seen!
Even if your local gas station has a big name on it 95% of them in the US are independent businesses. With half of the US population visiting them daily generating 160 mn transactions card fees add up!
In fact, credit card fees are their No.1 enemy because they are the No 2 cost of doing business behind paying employee salaries. Meaning that card fees are more than rent and every other expense!
The Fed should listen to the “little guy”
These statements from the NACS should move you because of their candor:
🔹 “One assumption articulated in the Federal Reserve’s paper on digital currency requires more focus. The paper states that the U.S. payment system is “generally effective and efficient.” –In our view, it is not.– “
🔹”There are profound problems with credit and debit card payments in the US. These payments carry with them the most fraud and the highest interchange fees in the world.”
🔹“In particular, competition problems in U.S. payments have the most negative effects for lower-income Americans.”
So while Fed governors tell you that the US payment system is “state-of-the-art” and see no need for a digital dollar, retailers disagree! Their claim is simple, the Visa and Mastercard duopoly is hurting all of us!
That Fed governors don't listen and see no need for a CBDC shows just how out of touch they are and that they serve only the banks.
Open banking innovation
The NACS goes even further though discussing open banking and the need for innovation:
🔹”Traditional banks will not have the incentive to provide innovative financial products and services if they have a monopoly on servicing consumers with CBDCs.”
🔹 “As wide a variety as possible of financial companies and technology providers should be able to offer wallets, processing services, infrastructure, and more.”
🔹 “[on the CBDC design] "Visa and Mastercard should not be contractors to create it.”
Congratulations to the NACS for supporting the digital dollar project and explaining why in such clear terms.
I hope that for once the Fed listens to the little guy.
3. DeFi meets TradFi in Singapore
Special Article
Link to article here! Or click on picture.
Friends this was such an important read it became an article here on substack all its own!
What you will learn:
DeFi may seem overrun by fraud but the tech is quite good!
Watch as big banks coopt DeFi tech for their own uses.
Why DeFi with regulations will be an important part of our future
4. We’re going “Cashless” faster than you think!
We’re going “Cashless” faster than you think, whether you like it or not!
If that sounds harsh it is intended to be. The reality is that technology is pushing us ever forward and closer to digital societies that need digital currency in –all– of its forms.
We are that transitional generation and no one can put the digital currency genie back in the bottle! 70% of respondent executives think the transition to CBDC will occur in the next 10 years. Download Economist Report: Here
In this wonderful report by The Economist, we get survey results of some 3,000 people that show clearly that there is no turning back.
This report has fabulous stats on both crypto and CBDC that shows how people already anticipate the transition.
I pulled out the relevant stats for both the general population and execs that are CBDC specific to let the profound nature of the changes coming sink in:
🔵 Almost four in ten consumers expect their governments or central banks to launch a central bank digital currency (CBDC) in the next three years.
🔵 CBDCs are now favoured by 14% of people, a big increase from 4% in 2021.
🔵 47% expect their country to become cashless over the next 3 to 5 years.
🔵 CBDCs continue to be hampered by a lack of education (27%), technical literacy (27%), as well as unequal access (27%), the latter which has risen in importance YOY (20%).
Now among executives who are likely to be more knowledgable about CBDC the stats are even more stunning:
🔴 Executives increasingly believe CBDCs are likely to replace physical currency in their country: almost two-thirds (65%) say this will be the case compared with about one-half (56%) last year.
🔴 70% now say it will happen within a decade, compared to six in ten (58%) a year ago.
🔴 🔥93% now say they agree that issuance of CBDCs is necessary to establish a functioning market for new financial instruments such as digital bonds or other forms of digital assets, up from eight in ten (78%) a year ago.🔥
🔴 82% say the establishment of CBDCs will increase general demand for other forms of digital currencies and assets that are not government backed.
I confess that I rail against those seeking to delay the transformation to digital currencies because I see them as improving life for so many. I live a cashless life and love it!
Still what is important to understand is that Fed governors, banks, credit card companies, lobbying groups, crypto maximalists, and naysayers can only hope to delay the CBDC transition, they cannot stop the inevitable.
I said earlier that we are the transitional generation. How fast we go digital will vary between countries and regions. My bet, however, is that no matter where you live it's coming faster than you think.
Regardless of how fast we get there, we all share a digital currency future.
5. CBDC Policy, Technology & Programmability
Amazon Web Services comes out with one of the best CBDC papers I’ve read in a long time!
In this paper, AWS and Oliver Wyman beautifully link the relationship between policy objectives and technology design choices as a series of tradeoffs. Frankly I’ve never seen this done before so effectively. Download: here
Here’s the harsh reality when building a CBDC, governments have policy objectives that can never be met in full given technology’s limitations. What this AWS paper does is show how these two factors work either for or against one another to highlight the design compromises required.
I've never seen a document like this and want to highlight two particular sections.
🔴 Programmability: Page 31
One of the questions I am frequently asked is about CBDC programmability. I usually answer by discussing smart contracts, the easiest for most to grasp. The box on page 31 does a great job of showing how programmability is more than smart contracts and is built into a CBDC at multiple levels.
Figure 7 shows how programmability can be built into CBDCs at 5 different places across the CBDC tech stack.
The top three are:
-External Apps: Here the apps can have limits on CBDC holdings or payment amounts as China’s do. While this isn’t programmability as most think of it, it is critical to the functioning of the system and may differ depending on the wallet provider. But wallets are going to do far more, like top-up CBDC balances and react to your needs. There are so many new options that in China the “wallet wars” or battle for your wallet are just beginning.
-Application Layer: This is perhaps the easiest to visualize as smart contracts like those on the Ethereum network can be deployed here. So the irony is, of course, that smart contracts while great technology is actually fairly dangerous. If the coder gets it wrong the results can be expensive as we’ve seen with regular errors in the crypto space. For this reason, the digital yuan will have all of its smart contract features turned off when finally launched in China. That said, tests are underway!
-Data Layer: This layer is perhaps the most powerful and underappreciated. The data layer essentially allows the CBDC to interact with its data. So if you give an aid payment to someone in Shenzhen and don’t want it spent in Shanghai you can use the data layer to limit payment to wallets in a particular region. Or as US senators appear not to be aware, ensure no payment from a US phone could be made! The data layer of CBDCs is tremendously powerful as it will control who, where and when we spend CBDC. This scares some people as they don’t like the idea of a controlled CBDC. Still, the precedent already exists in the EU and US with aid money that is given away in debit cards that can’t buy alcohol and has to be spent within a few months.
🔵 The digital dollar and euro: Figure 11, pg 58
Here the authors show what they believe to be the most common configurations of CBDC. If you want to know what the Digital Dollar and Euro will look like see the 2nd column entitled “Sovereign and Private” with a description on page 60.
Look how in No 2, “Sovereign and Private” identity is anaonymous to the system
In this particular version of CBDC two critical policy goals are attained:
1) Privacy of users is maintained.
2) Commercial banks maintain an important role in the economy.
In order for the US or EU to get a CBDC through their political systems, both are required. One small change I would make to this example would be to do away with accounts and adopt token-based wallets as China has done.
This paper is a great read as it showed exactly how technology and policy are intertwined.
A better understanding of the two will help ensure we get the CBDC we deserve!
Thanks for reading
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Rich Turrin is the international best-selling author of "Cashless - China's Digital Currency Revolution" and "Innovation Lab Excellence." He is an Onalytica Top 100 Fintech Influencer and an award-winning executive previously heading fintech teams at IBM following a twenty-year career in investment banking. Living in Shanghai for the last decade, Rich experienced China going cashless first-hand. Rich is an independent consultant whose views on China's astounding fintech developments are widely sought by international media and private clients.
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