The E-Cash alternative

CBDCs and stablecoins have been getting most of the attention lately. In contrast the release in late March 2022 of a draft bill titled the ECASH Act seems to have flown under the radar. The bill as I understand it is only a proposal at this stage and not something actively in the process of becoming law. It is however worth noting for a couple of reasons

  • Is is a useful reminder that an account based CBDC is not the only form of government issued digital money that might be pursued (though the account based model does seem to be the model preferred by the BIS mostly due to concerns about illegal use of anonymous forms of money)
  • Primary responsibility for E-Cash is assigned to the US Treasury, not the Central Bank (so technically it is not a CBDC per se)
  • Although I personally am not overly concerned by the current state of Know Your Customer and related anti money laundering, anti terrorist financing requirements applied to bank accounts, I respect the views of those for whom privacy is a priority or don’t have the benefit of living in the kind of economy/society that allows me to be relaxed about these questions
  • So long as the digital form of cash is subject to an equivalent set of controls on illicit activity as is applied to physical cash, then I can’t see why the digital option should be prohibited
  • Adding a digital money option that is capable of operating in an off-line environment also looks to me like a useful (albeit limited) level of redundancy and resilience in a world that increasingly relies on a 24/7 supply of power and internet connectivity for money to function
Who needs e-cash?

You can find more detail about the proposal here but for those short of time the argument put up by the Act’s proponents for why someone might want to use E-Cash is summarised as those who:

1. Lack access to traditional banking/payments services;

2. Value privacy and wish to avoid surveillance and/or data-mining;

3. Are concerned about third-party censorship and/or discrimination;

3. Lack reliable internet or digital network connectivity; and

5. Are low-income and/or cannot afford high transaction, withdrawal, and exchange fees.

www://https.ecashact.us/#whyuse

The Act’s proponents emphasise however that “… E-Cash, like physical cash, does not pay interest, and offers less third-party protections than traditional bank accounts or payments app (chargebacks, loss and fraud-prevention, etc).” The basic idea is that this is a complement to the existing forms of money (physical and digital) and it is not envisaged that most people will seek to hold large amounts in the form of E-Cash.

What exactly does the ECASH Act proposes?

1. Directs the Secretary of the Treasury to develop and introduce a form of retail digital dollar called “e-cash,” which replicates the offline-capable, peer-to-peer, privacy-respecting, zero transaction-fee, and payable-to-bearer features of physical cash, and to coordinate their efforts with other agencies, including the Federal Reserve through an intergovernmental Digital Dollar Council led by the Treasury Secretary;

2. Establishes an Electronic Currency Innovation Program within the U.S. Treasury to test and evaluate different forms of secure hardware-based e-cash devices that do not require internet access, third-party validation, or settlement on or via a common ledger, with a focus on widely available, interoperable architectures such as stored-value cards and cell phones;

3. Establishes an independent Monetary Privacy Board to oversee and monitor the federal government’s efforts to preserve monetary privacy and protect civil liberties in the development of digital dollar technologies and services, and directs the Treasury Secretary to, wherever possible, promote and prioritise open-source licensed software and hardware, and to make all technical information available for public review and comment; and

4. Establishes a special-purpose, ring-fenced Treasury overdraft account at the Federal Reserve Bank of New York to cover any and all government expenses related to the development and piloting of E-Cash, and directs the Board of Governors of the Federal Reserve System to take appropriate liquidity-support measures to ensure that the introduction of e-cash does not reduce the ability of banks, credit unions, or community development financial institutions to extend credit and other financial services to underserved populations, as prescribed under the Community Reinvestment Act of 1977 and related laws.

www:https://ecashact.us/#ecashact

Summing up

I have been a professed sceptic on the need for a retail CBDC in advanced economies with well functioning fast payment systems (see here and here) but this proposal is intriguing and one that I will watch with interest.

Tony – From the Outside

Author: From the Outside

After working in the Australian banking system for close to four decades, I am taking some time out to write and reflect on what I have learned. My primary area of expertise is bank capital management but this blog aims to offer a bank insider's outside perspective on banking, capital, economics, finance and risk.

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