Alexander Lipton is the CTO of Sila, a visiting professor and Dean’s Fellow at the Jerusalem Business School of the Hebrew University of Jerusalem, and a Connection Science Fellow at the Massachusetts Institute of Technology.
As many still wait to receive the check from the Paycheck Protection Program and Health Care Enhancement Act, which is set to distribute $484 billion in an effort to boost the U.S. economy, it brings to the forefront the question of why central banks have still not created a true digital alternative to cash.
When completed, the Economic Impact Payment program will distribute 150 million payments. Eighty million people who received their 2018 or 2019 tax refund by direct deposit will receive direct deposits. The rest will primarily be paid using paper bank checks. As of May 6, 2020, there was $1.87 trillion worth of Federal Reserve notes in circulation, which accounts for 5%-10% of all U.S. currency in circulation, with the remaining 90% sitting in financial institutions or electronic accounts. Just under half of the stimulus payments are sent via paper check, which incurs additional cost to the government and recipients (especially the unbanked, who will face exorbitant fees). This alone shows how misaligned the current banking infrastructure is in the U.S. with the reality of how money circulates today.
Financial systems as we know them are on their last legs due to persistent negative or barely positive interest rates. Open access internet protocols have unleashed a wave of creativity and growth in finance and beyond, but banking is not one of them. The reason stems mostly from the fact that successful open-access protocols for money and identity, while sorely needed, are conspicuously absent at present. A regulatory-compliant, fiat-backed tokenized medium of exchange can help to fill this gap. While bitcoin has led the charge for a new vision of cryptocurrencies, the emergence of stablecoins is possibly more critical by way of filling this gap. My co-founder at Sila, Shamir Karkal, gave his opinion on the role FedNow will have in modernizing U.S. payment systems, but FedNow is still five years away and focuses on updating an ACH [automated clearinghouse] system that has barely been improved upon since 1972.
What is more troubling is the prevailing macroeconomic framework, which authorities use to guide macroeconomic activity, is based on outdated paradigms. Standard models that are supposed to govern money creation and interest rates, for example, still treat private banks as pure intermediaries, ignoring the fact that they are big, active, money-creating elements unto themselves. The fact that banks have their self-centered motivations and…