Frances Coppola, a CoinDesk columnist, is a freelance writer and speaker on banking, finance and economics. Her book “The Case for People’s Quantitative Easing” explains how modern money creation and quantitative easing work, and advocates “helicopter money” to help economies out of recession.
The responses of governments to the coronavirus pandemic have been extraordinary. Governments around the world have enacted emergency legislation to protect people from loss of income and keep businesses alive as far as possible. The U.S. government, for example, is handing out free money to every American and providing cheap loans to businesses. But although the principle of just giving people money appears simple, delivering that money has run into a problem all too familiar to Bitcoiners. Governments have encountered a scaling problem.
The first sign of the scaling problem appeared when people started losing their jobs. U.S. government websites crashed due to huge spikes in new claims for unemployment insurance, and in the U.K., people waited for hours on the phone to speak to an adviser. Again, this would be familiar to Bitcoiners. Making people wait, and wait, and wait, is how cryptocurrency exchanges manage demands for withdrawals that they can’t immediately meet.
Despite valiant attempts to create faster second layers, the solution to Bitcoin’s scaling problem ended up being surge pricing: as average wait times for settlement increased, people who wanted their money quickly paid ever-higher transaction fees. But people desperate to get some money to pay the rent when their job has disappeared overnight can’t pay high transaction fees, and they can’t wait a long time for their money either. The de facto scaling solution adopted by Bitcoin won’t work for them.
So, instead of overwhelming websites and advisers by forcing millions of people to claim unemployment insurance all at once, why not just give everyone money? Under the new CARES Act, every adult American will receive $1200, and every child $500. Sounds like a simple solution, doesn’t it?
If only it were. The original proposal was to send everyone a check. Check production is an intensely manual process: the checks have to be printed, signed, envelopes have to be addressed, the checks have to be put in envelopes, mailed… I tried to work out how long it would take the IRS to send checks to 331 million people, and gave up when the answer started to run into years. And then the checks have to be physically presented at banks. There would be lines a quarter-mile long outside banks, not to withdraw funds but to put them in. And how long would it take the banks to process these checks?
Fortunately, the IRS isn’t sending checks to every American. It is distributing funds electronically to 60 million households. If you have filed a tax return and the IRS already has bank deposit details for you, and you will get your money automatically. But even so, your money may take a week or two to arrive. After all, electronic funds transfers have to be processed. And the IRS isn’t used to distributing money on this scale.
But everyone else will get checks. Admittedly, these will go to households not individuals, but even so, people may have to wait a long time for their money. The IRS is expecting to send out 100 million checks at a rate of 5 million per week, starting on April 24, so the last round of checks won’t go out until September. It’s not clear how long banks will take to process these checks. So if anyone is relying on these checks to pay their rent or buy food, they will be homeless and starving by the time the money arrives.
And if you are one of the estimated 10 million Americans who don’t file tax returns, this money comes with strings attached. Unless you receive Social Security or Veterans’ benefits, you will have to tell the IRS that you exist, by filing a null tax return: how long it will take the IRS to process all these new tax returns from people it has never heard of remains to be seen. You will also have to give them either your mailing address for a check, or your bank details. So the government will end up knowing a whole lot more about you than it did before. And if you don’t have either a permanent mailing address or a bank account, it’s not clear how you can claim the money at all.
In short, a brilliantly simple idea – give money to everyone – has become a complex, inefficient and intrusive mess. I believe that the crypto and fintech industries could come up with something much better than this.
Firstly, it really is time to ditch checks. It’s hard to imagine a less efficient way of getting money to people than mailing them pieces of paper that have to be presented at a bank.
Secondly, it’s time to ditch banks. There is no need to force people to have bank accounts. All they need is a wallet.
There is also no need for people to have to tell the IRS anything about themselves. If we agree that everyone should be able to access money in a crisis with no questions asked, then all that people need to give the IRS is their wallet address. Their privacy can be maintained – though of course, politics being what it is, the government might still insist that there is some kind of additional identity check, perhaps to stop undocumented immigrants from claiming.
But eliminating checks and banks won’t be enough to get money to people fast. Even when the gateway to it is streamlined, a single payments architecture is always prone to gridlock at peak times. Bitcoin’s surge pricing isn’t an option for governments, and nor is making people wait for weeks or months to receive their payments. But the crypto industry learned in 2018 that the best way of dealing with capacity problems in a payments architecture is to diversify. Multiple payment rails spread the load, ensuring everyone gets their money quickly and cheaply. That’s a lesson that the U.S. government needs to learn.
These days, by far the fastest and most efficient way of delivering money is via smartphones and mobile devices. The U.S. government should simply provide a general portal to a wide range of payment delivery mechanisms. Visa and Mastercard are easily capable of handling these payments, especially as their normal transaction volumes have fallen significantly due to the shutdown. But the government should also work with platforms such as Venmo, Zelle, Square Cash, Paypal, Apple Pay and Google Pay [Chime, a San Francisco fintech startup, says it's piloted a way to distribute the $1200]. And it could also offer payment in cryptocurrency as an option. Let’s have a mobile money explosion, and let people choose how to receive their money.
Using smartphones and mobile devices to deliver stimulus money could also potentially reach more people than checks or digital deposits. An estimated 96 percent of Americans have smartphones. That’s more people than have bank accounts.
I hope it’s not too late to set this up for the current pandemic. But if it is, let’s sort it out for next time, yes?