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By all accounts, the U.S. government moved with purpose to respond to the economic fallout triggered by the extreme public health measures taken to stem the spread of COVID-19.
But what is clearly hampering the governmental response to the pandemic is its financial infrastructure: rickety, dated, and incapable of serving portions of the population in a targeted and timely manner. The stories of reliance on physical delivery of stimulus checks, tech bottlenecks at the SBA, and benefits systems running on a computer programming language created in the 1950s paint a grim picture.
This is a stark contrast to the internet and digital economy that has created resiliency, productivity, and opportunity for many Americans at a time we are restricted from acting in our physical world.
As Washington shifts focus to the next phases of the coronavirus crisis response, there is more vocal discussion of infrastructure investment. Any investment in infrastructure needs to include digital financial infrastructure. It is imperative that the U.S. upgrade its financial infrastructure on four digital fronts: payments; currency; identity, and data.
1. Payments: On payments, we need broadly accessible systems that are instant: as is possible in countries around the world money sent from any bank account or wallet to another account or wallet must be deposited within seconds.
America’s dated payment system was already hurting unbanked and under-banked Americans before this crisis: many individuals wind up using high-cost check cashers ($2 billion annual fees), small dollar “pay day” lenders ($7 billion), or are charged bank overdraft fees ($24 billion).
The Fed has the authority to make payments real time and last year launched the FedNow project. But FedNow is expected to go live by 2024 — a coronavirus vaccine might be available sooner.
The Fed could move faster, accelerating progress on FedNow by not building from scratch. One way to do that is to leverage private sector solutions through a public framework, as has been done in countries such as India, with its Unified Payments Interface (UPI).
The FedNow project could incorporate both bank and non-bank innovative private sector payment platforms — with the requirement that they be interoperable and compliant with network rules — in order to broaden access and approaches to real-time payments. This effort would avoid unnecessarily duplicating existing approaches, such as the real-time network launched by The Clearing House (a bank-driven clearing network for payments transactions owned by the biggest banks) in 2017, and allow for a more robust and dynamic payments landscape.
2. Currency: Beyond payment rails and processes, we need to upgrade the infrastructure of money itself. Central banks around the world have been actively exploring such system upgrades with China announcing this week that it had begun piloting its digital yuan across four major cities.
While the immediate crisis period is not the time to fully implement major changes to how the government architects and moves money, it does highlight the prudence in exploring and testing new models that can substitute for the current process of sending paper checks to underbanked populations.
One such model championed by the Digital Dollar Project would be based on the Federal Reserve’s tokenization of the U.S. dollar DXY, -0.13% , which would then be accessed through banks and regulated money transmitters. This would be a more fundamental shift in the architecture of money and go beyond electronic, account-based solutions. Policymakers should support real-world pilots now so that potential implementation can occur through a thoughtful and deliberative process and before the next crisis.
3. Identity: One of the biggest challenges the U.S. currently faces in deploying emergency relief or expanding access to financial services more broadly is actually identifying individuals to satisfy Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements. (KYC is part of banking regulation requiring a financial services entity to know the identity of its customer and be sure there are no suspicious activities, including money laundering and terrorist financing.)
There’s a need for a 21st Century digital identity framework. To begin with, regulated financial services providers should be able to pull data through secure application programmable interfaces (APIs) from government agencies.
For example, the IRS holds data that can speed and de-risk the KYC (and underwriting) process. Legislation passed by Congress last year requires the IRS to begin building an income verification API, but the creation of these types of data interfaces need to be expedited and expanded. Services like this would have made it easier for small businesses to be authenticated when applying for SBA emergency relief funds.
Additionally, policymakers could facilitate the sharing of KYC data between financial services providers in order to expedite the KYC process. As demonstrated by ongoing efforts in countries like Singapore, one way to do that is to allow regulated financial intermediaries to “port” existing KYC information to another bank or regulated intermediary.
Longer-term, the technological and requisite government databases exist to identify and authenticate an individual instantaneously using biometric data, subject to appropriate legal safeguards. For example, an app could use facial recognition technology to automatically ping a DMV photo database to validate the end-user, but without the identity utility or any single entity amassing and storing the biometric information.
4. Data: The digital infrastructure concepts outlined above are largely based on access to, and movement of, data. The guiding principles for a 21st Century compact on data and privacy must be that individuals have choice and control when it comes to the use and movement of their data, and requirements should drive competition in the provision of digital services.
We need a modern policy framework that would provide the rules for accessing, controlling, moving, and utilizing digitized information. In the short term, we could upgrade existing data laws like Graham Leach Bliley that were enacted before the iPhone was launched in 2007.
More immediately, we could also create a new federal Data and Digital Innovation Office (perhaps housed at the FTC) tasked with recommending regulatory guardrails that would drive competition and new customer-centric business models, research modern privacy expectations, and test more effective informed consent approaches.
We have already learned a critical lesson from this crisis: our financial infrastructure is no longer fit for purpose. As we look for ways that policy can help us through and out of this crisis, let’s invest further in technologies unbounded by physical limitations.
Daniel Gorfine is the founder of Gattaca Horizons LLC, serves as an adjunct professor at the Georgetown University Law Center, and is a co-founder of the Digital Dollar Project. He is former chief innovation officer of the U.S. Commodity Futures Trading Commission.
Kabir Kumar is Director at Flourish Ventures, a venture of the Omidyar Group that invests in innovative companies focused on helping people achieve financial health and prosperity.
