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Stablecoins: The Future of Economic Stimulus

When you examine the current use cases of stablecoins or digital currencies, they hold great value and promise for cross-border payments and remittances and in countries where hyperinflation is rampant. They also provide traders with a means to protect themselves against volatility and for arbitrage.

However, if we are to witness stablecoins or digital currencies gain mainstream appeal, we need more impactful use cases that appeal to those beyond the crypto and blockchain space.

Now, amid the fear and uncertainty of the COVID 19 pandemic, such use cases may arise to make this leap.

Overcoming Cost and Speed Drawbacks

As of May, the unemployment rate was at a staggering 13.3% in the US [2]. The urgency for aid cannot be greater. As governments continue to scramble in providing economic aid, the manner in which relief is delivered is crying out for innovation. Currently, there are two methods to deliver economic aid; 1) a direct deposit into your bank account and 2) a paper check or a prepaid card if the overlying institution does not have the necessary banking details of the individual. Beyond the facts that a) countless individuals do not have bank accounts (55 million in the US) and thus cannot receive direct deposits, and b) that paper check or prepaid cards are not a sterile approach, there are two primary problems with these delivery methods:

  1. Cost: For those able to receive direct deposits in the US, payments so far have been made using traditional ACH transfers. While some ACH providers charge a flat fee ranging from $0.20 to $1.50 per transaction, others charge a percentage fee that can range from 0.5% to 1.5% [3]. If we assume that the minimum fee per transaction is $0.20, “the U.S. Government will spend between $47.82 million and $358.65 million of capital reserved for life-saving aid on transaction fees alone (for 128.58 million families and 110.6 million single adult disbursements)” [3]. Meanwhile, the cost of sending a stimulus check to the 55 million unbanked in the US will total at $165 million given that the government will need to spend $3.00 per paper check sent.
  2. Speed: Individuals receiving direct deposits via traditional ACH transfers will have to wait for one to four business days while it can take weeks if not months to receive a paper check with as many as 35 million still waiting [4].

People need economic aid and in a manner that is urgent, cost-effective, and lessens widespread panic. The current solutions are not meeting these factors. Stablecoins however, offer a very viable alternative (Figure 1), especially with the increase in mobile ownership. One can assume that many of 55 million who are unbanked for example own a mobile device given that 94% of adults report owning one in the US [5]. As stablecoins can be distributed digitally, individuals would be able to access their relief immediately while eliminating the risk of both losing a check and counterfeit. The stablecoin could also resemble the consumer’s local currency to avoid confusion [3]. Meanwhile, if governments are exploring stimulus installment options, stablecoins could be programmed to be put in escrow and released over a certain period of time [6]. Furthermore, no longer would one need a house or mailbox to receive paper checks. Instead, all that is needed is internet access along with a mobile device.

Figure 1 — How a stablecoin, sitting on Conflux Network, is instantly distributed vs traditional stimulus delivery methods

Stimulating the Economy

Beyond just providing a better means of delivering stimulus, there are further potential benefits of using stablecoins during times of crisis. During his DeFi Discussions presentation, Ezechiel Copic discussed the means in which stablecoins could potentially stimulate the economy during a downturn.

Firstly, stablecoins could be used as a better method to stimulate the economy. The whole idea behind stimulus packages during an economic downturn is to elicit a response from the private sector economy [7], which can be as simple as individuals spending money at their local supermarket or salon. However, governments cannot ensure that the public is doing so. They can only deposit funds directly into your account or provide stimulus checks or cards in the hope that they will be used in the respective economy. With stablecoins however, as they are programmable through smart contracts, limitations could be placed to ensure that individuals spend a small percentage of their stimulus funds at local, authorized merchants and thus provide support for their local community.

While such an idea sounds promising on paper, there will naturally be some pushback. Placing any limitations on how individuals spend their stimulus would not be welcome. Instead, rather than placing local usage limitations, provide an incentive to spend locally. Given that data would be captured on how the individual is spending their digital aid, allow the individual to monetize their data, and earn from it. One other mean could be to offer non-fungible tokens (NFT’s) in the form of local business bonds as part of the digital aid. These bonds would be non-fungible tokens that could be used as credit in a range of local, authorized businesses. A similar idea had been employed in New York where one restaurant, to survive the enforced quarantine period, offered discounted gift cards that were NFT’s [8].

The other benefit involves lessening the hoarding of stimulus funds. Let’s look at the United States during the 2008 recession and the years following it. A substantial amount of money was introduced into the United States economy with one of the aims being to increase the velocity of money which in turn would grow the GDP. The velocity of money can simply be defined as the number of times money moves from one entity to another. “When an economy is in an expansion, consumers and businesses tend to more readily spend money causing the velocity of money to increase” [9]. When the economy is contracting, as we saw with the 2008 recession and as we are seeing now, consumers and businesses are more reluctant to spend. The current issue with money velocity however is that we cannot currently track the circulation of physical banknotes [10]. And since there is no real-time insight into the velocity, economists assume that velocity will remain constant as money supply increases. The velocity of money does not remain constant, however. While the economy grew by $5.3 trillion in the years following the 2008 recession, there were unrealized gains of $15.5 trillion due to the declining velocity of money over that period of time (2008–2017) [10]. Why were people still reluctant to spend money despite receiving a stimulus from the government during this time? It results from the conflicting roles of money.

Money has three roles; medium of exchange, store of value, and unit of account. While the stimulus is provided to encourage people to use money as a medium of exchange and therefore increase the velocity of money in the economy, people favor using it as a store of value during crises given the economic uncertainty. This is understandable. However, it can bring the economy to a standstill. Hence, we have the problem of hoarding stimulus funds.

A way to prevent the hoarding of stimulus funds and increase the velocity of money could be to introduce demurrage fees if the aid is not spent within a certain period. Let’s imagine the government has a central bank digital currency (CBDC). Aid is provided in the form of the CBDC directly into an individual’s wallet. The individual can either a) spend the CBDC within the time limit and not accrue a demurrage fee or b) not spend the CDBC within the time limit and accrue the demurrage fee which is directly sent to a pot. Of course, regardless of what the individual chooses to do, the CBDC can still be used. Meanwhile, the pot holding the demurrage fees can be used on social welfare programs or operational costs.

Figure 2 — Demurrage fee model implemented using a CBDC

Certainly, one of the most promising aspects of this model is the demurrage fee pot especially if they are used for social welfare. However, again, I could see pushback on this idea. What is important here is to communicate that one’s individual stimulus can still be spent regardless and even if they are penalized, show where their demurrage fee is going and how it is spent which of course can be done through the transparency provided by the blockchain.

We have seen similar models work in the past. For example, one method that has solved the issue of money hoarding in the past is stamped money. Stamped money is essentially money that decays over time with the idea being it serves only as an instrument of exchange and nothing else [11]. In the small town of Wörgl, Austria in 1932, it was introduced as a means to combat the skyrocketing unemployment and business closures. And it worked. With the velocity of money increased, money hoarding was eliminated, employment growth rose and the town was lifted out of recession.

Moving Forward

While implementing stablecoins in a programmable manner definitely has the potential to benefit individuals and possibly the economy as a whole, they are absolutely worthless if no one can actually use them. How would ordinary people, those who are not accustomed to the world of crypto wallets and digital asset exchanges, even begin to receive their aid via stablecoins? Fortunately, there is now a greater emphasis on UX especially for marginalized communities, as well as making the custody of stablecoins more accessible for the general public. Furthermore, education must go hand in hand with the distribution given the stigma that exists surrounding cryptocurrencies and lack of education regarding stablecoins and the blockchain industry as a whole. The government and the public need to be well informed about how stablecoins work, how individuals can exchange them into fiat money, and the benefits that can result from their use [5].

Another challenge regarding implementing stablecoins at this scale is scalability. Any wide scale payment solution must be fast and cheap and be built on a platform that is built for scale. Conflux Network is one such platform. Furthermore, at Conflux Network, we believe that systematic change is needed to the systems that have thus far limited growth and opportunity to many around the world. We are continuing to explore stablecoin options to deploy on our network given that they are one of the many elements that will drive this change.

Written by Conflux Network’s Analyst, Niall Yorke

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Conflux Network

Conflux is a PoW + PoS hybrid first layer consensus blockchain for dApps that require speed at scale, without sacrificing decentralization.