Proponents of central bank digital currencies (CBDCs) often point to the additional fiscal policy options that CBDCs enable, such as the efficient delivery of stimulus payments. The COVID-19 pandemic exposed this weakness in the U.S. financial system when the government struggled to quickly deliver payments to those in need under the CARES Act. As a result, those with banking and higher incomes quickly received their stimulus payments, while those with and without banking – those in need of financial assistance most – stood at the end of the line.
A CBDC could not only transform stimulus payments, but also enable unlimited fiscal policy options.
Depending on the structure of a CBDC platform, CBDCs could be deposited directly into digital wallets almost instantly. In the model where citizens had accounts with their central bank, incentive payments could be delivered by the central bank in seconds, provided that adequate Know Your Customer (KYC) checks were in place at the national level. In the indirect two-tier model, in which commercial banks are at the heart of the financial system, stimulation via CBDCs could still be faster than in the current model.
Regardless of the structure of the CBDC platform, the potential fiscal options that CBDCs are opening up are impressive. Just as food stamps are serving as a targeted solution to food insecurity today, specially tailored CBDCs could do the same in the digital arena; Therefore, CBDCs could be “tagged” for certain goods and services. For example, a government could set up CBDCs specifically designed to help a family pay a home rent. CBDCs could enable policymakers nationwide to develop more personalized and precise support options for individuals and communities.
CBDCs could also be tailored to stimulate the economy on a more macroeconomic level. For example, if incentive payments are meant to boost demand in the economy, time-bound CBDCs could encourage consumers to spend their money before it goes away and boost the economy. In the case of the CARES bill, time-bound CBDCs could have prompted Americans to spend their incentives faster, which would have further accelerated the economic recovery. Region-specific CBDCs could be created to stimulate the economy at the local level, for example if a typhoon devastated a particular city. CBDCs could also be associated with specific industries that have received government support or subsidies in the past, such as agriculture, green energy, or AI technology.
Finally, specially marked CBDCs could also be used for foreign aid to track spending and ensure aid is effectively distributed. While the numerous stimulus options that CBDCs create are potentially transformative, they are still just that – options. The technology behind CBDCs may enable additional economic policy options, but it is up to government decision-makers to issue CBDCs and discuss the merits of the new economic toolkit.
At Ripple, we believe governments should empower CBDCs to empower their members and unleash the next wave of financial inclusion and innovation.
To learn more about CBDCs, contact us at firstname.lastname@example.org or download Ripple’s CBDC white paper.