We need a new foundation to power America’s needs. But technology alone won’t solve it.
By Stephane Lintner
In the early days of the coronavirus crisis, after the first $1,200 stimulus checks were announced, it came as a jolt to many Americans that there was no fast and easy way for the federal government to actually put that money into their pockets. Serious questions were raised in the aftermath, best exemplified by venture capitalist Marc Andreessen in his letter, “A Time to Build.”
“A government that collects money from all its citizens and businesses each year,” Andreessen wrote, “has never built a system to distribute money to us when it’s needed most.”
It’s true that the government hasn’t built such a system, though to be fair, it’s a lot harder than it looks. I’ve been in this industry for 13 years. I witnessed the 2007–2008 crisis from inside Goldman Sachs where I eventually held a Managing Director position. Now, for the last three years, my team and I have had our heads down building Jiko, a company that gives people control over the movement and storage of their own cash, via ownership of US Treasuries. We call our concept ‘Spendable T-Bills.’ It’s simple and yet, it’s an entirely new approach to money that happens to be well suited to everyday cash transactions and to what’s needed right now at the federal level: a frictionless, low-risk, low-cost mechanism for transmitting and storing money at the scale of the country.
US Treasury Bills are a key component of the global economy — the most liquid and trustworthy financial instrument in the world — and yet they have never been easily accessible to individual consumers. That’s what Jiko is changing. That is our innovation. One we think worthy of attention.
But to best explain why we should all care about a platform built on T-Bills, I’d like to back up to the core issue of scale and efficiency that has become apparent in the last two months, and share insights which hopefully will help explain that the problem isn’t just about antiquated technology. It has to do with a banking model that has evolved over 200 years and cannot handle today’s needs effectively.
The problem: money storage
Simply put, America needs a system that can:
- Transmit money very quickly, at scale.
- Operate with precision and efficiency to ensure that, for example, emergency funding reaches its rightful owner in immediate need. Not to scammers, thank you very much.
- Store money safely for a little while, before and after it’s been moved — since not everyone spends everything immediately.
Curious as it may seem, in 2020, the United States does not have a single entity/platform/company/government-tool to do all three pieces. It is not just a matter of technology. If that’s all it was, BigTech & Fintechs would have cracked it 20 years ago.
The card networks like Visa, MasterCard or Discover handle transmission very well for example, while PayPal excels at fraud and identification. But neither Paypal nor Visa holds your paychecks and savings. They just move it from one bank to another. The ones you trust with the storage are the banks.
A simple picture to keep in mind is this: the financial system (in the US) is made of over 6,500 ‘nodes’, also known as the ‘banks’. Small and large, each is able to store a limited amount of money depending on its size, and interface with the payment networks at some speed. The US government itself sits on one side, the people on the other. In between: the nodes/banks.
Now let’s say you needed to get $1,000 each to 200 million Americans very quickly — that is, $200 billion in volume. Each person needs to be identified. Are you “banking” at node 2145 or 5931? How do we even confirm that reliably?
The picture is further complicated by the fact that since banks have accounts at other banks, thanks to a century-old clearing system, there are large files and settlements jumping around all the nodes, with returns, errors and delays. How much each node can actually process and store is not really known at the moment when the government needs to send the funds. How much will come back, be returned, or routed to the wrong accounts is also unknown. And then, like in any network, some nodes stop working. This means that in times of stress, at the time where emergency funding is truly needed, banks can (and sometimes do) fail.
So let’s say it again, with the above picture in mind: the problem is not just technological (even mainframes and COBOL can be fast, but that’s a different story).
To understand the problem further, we need to follow the money, and two questions are worth asking:
What does it mean to have my ‘money at the bank?’
There is very little ‘real’ money in the form of greenbacks at the bank. What most of us tend to forget, is that a deposit at a bank takes the form of a ‘liability’ on the bank’s balance sheet. Meaning that the bank now owes you the money and must hand it over when you ask for it, but in the meantime, the bank uses it freely. Your deposit in other words is… a ‘cash loan to the bank’.
So here’s what happens when you digitally reimburse a dinner companion for half your meal (remember restaurants?). You have your ‘money’ at Citigroup. Your friend has ‘money’ at Wells Fargo. You transfer an amount to them using your favorite network app. Now the loan you had made to Citigroup without really thinking about it, has turned into a loan between your friend and Wells Fargo. Consider that: there was a complete change in counterparties, a full re-papering of a loan with all sorts of asterisks on yield and more. If that sounds complicated and maybe risky, that’s because it is.
Where does the ‘bank’ itself keep the money?
Each bank has its own approach, but there’s one thing we know for sure: banks themselves don’t store the money you lend to them. They invest it in a lot of different things. That usually starts with very safe instruments guaranteed by the government, such as US Treasury Bills, which you, as a member of the great American public, do not have easy access to. But then that money can be invested in a number of ways — to fund consumer loans, to fund high APR credit cards, subprime mortgages, derivative positions. The incentives can clearly lead to short-sighted behavior: chase the highest return that the bank can get, compared to what it is paying you for having lent it your money.
Of course, the incentive structure doesn’t mean that all banks abuse it. Banks provide a very important function as credit providers to society, and most of the 6500+ US banks are working hard on servicing their communities, under close supervision of dedicated regulators. But herein lies the answer: because of all the risks involved, from a run-on-the-bank to a balance-sheet meltdown, regulators have learned over time to put stringent constraints on the ability of a bank to grow its deposit base quickly: things called capital cushions, liquidity ratios, etc. As long as the nodes operate on their current business of reinvesting your deposits in risky things, they will remain capacity constrained.
In summary. Money isn’t stored anywhere. The current system relies on capacity-constrained nodes (the banks) that “store” money by making investments and managing ‘deposits’ in the form of liabilities. Transfers between nodes are complicated and there are a lot of cumbersome checks and balances (for everyone’s safety).
The solution: money storage at the individual level
Back to the stimulus distribution problem now that we know the root cause. Can the system not be simplified, at least for the purpose of federal emergency disbursements, in a way that would allow every citizen, aka you, to manage (‘store’) his/her money, like a bank, directly? By reducing the complexity and risk all the way to the level of each citizen, a simpler network picture emerges. It’s the government on one side, and the 300+ million Americans directly on the other, each with their own money storage capability.
The answer is yes, it can be done. One account for everyone, your own digital vault if you will, where the core ‘storage’ is done the way banks do it: by keeping your money invested for you at all times. Except that since it’s your money, safety comes first, and you could just hold Treasury Bills: the same low-risk investment vehicle, mind you, that banks start with when they start investing your deposit And the same instrument, incidentally, that the US Treasury issues when it has to finance a large stimulus packages — yes, the stimulus is funded by debt.
Such an account, where the individual has a direct ownership on his Treasury Bills, equipped with fluid banking payment features (debit card, ACH capabilities) naturally plugs back into the financial system, and is, in our view, if it can be done efficiently and very cheaply, something everyone could and should have on the side: safety first, with chances of yield when things are good, universally available.
In a network where each citizen holds U.S. Treasury Bills directly:
- there is no more capacity issue. It becomes purely a technology matter, and that, in 2020, is something we all know how to solve, and build using modern architecture.
- the government’s money can reach everyone directly if needed, money can flow freely, and individuals can have the potential benefit from the immediate re-investment of their deposits into T-bills.
Such a system is not intended to replace banks. As stated earlier, the banking ‘nodes’ have an essential role in the financial world. Mortgages, consumer loans, business loans are fundamental stakes in America’s economic development model. But we could all benefit from an alternative, universal and vital layer that works at all times, good and bad.
It’s time to deploy
In summary, the problem which the stimulus refund program brought to light and which Andreessen highlighted simply boils down to money storage. We believe that a modern solution is the deployment of a scalable universal network that relies on T-Bills as a prime funding mechanism.
And here’s one silver lining. This network already exists. Jiko has built it, over three years of hard work, working with the right regulatory agencies and supportive investors. Most of the Jiko team comes from a heavy science and technology background. Many of us have our roots at Caltech and some of us (like me) found ourselves on the trading floors of large banks during the crisis in 2008. We learned how the system works from the inside and decided early on to build Jiko with the next crisis in mind.
This was by no means easy, as we have had to deal with so many important considerations: building a full-stack in-house technology that could scale to the entire country, while still protecting everyone’s privacy. Compliance, audits, certifications, board governance, risk assessments are part of our DNA. But most importantly, it was, and continues to be, all about focusing on turning the ‘spendable T-Bills’ experience into a light, functional and powerful product that we are rolling out now, at a time when it is most needed.
For Jiko, it is no longer time to build, it is time to deploy.