Influencing the Velocity of Central Bank Digital Currencies

Introduction and Background

The speaker begins by expressing gratitude for the opportunity to discuss the importance of digital currencies, particularly during times of crisis. They introduce themselves as Ezekiel, a partner at C Labs, a company working on the Celo platform. Ezekiel previously worked as a central banker at the Federal Reserve Bank of New York. The focus of the discussion is on the advantages of digital currencies, specifically central bank digital currencies (CBDCs).

Advantages of Digital Currencies in Crisis Times

Instantaneous Delivery of Money

During crises such as the COVID-19 pandemic, governments worldwide aim to provide stimulus money to their citizens quickly. However, traditional methods like direct deposits or paper checks can be slow and inefficient. Digital currencies, like a digital dollar, offer the advantage of instantaneously sending money to anyone with a smartphone, bypassing the need for bank accounts or physical checks.

Cost Efficiency

Traditional delivery methods, such as direct deposits or paper checks, come with significant costs. Estimates suggest that sending direct deposits to millions of people can cost hundreds of millions of dollars. On the other hand, digital currencies can significantly reduce these costs, potentially amounting to less than a penny per transaction.

Directed Spending

Governments want to ensure that stimulus funds are used within the local economy to support local businesses. With traditional methods, once the money is deposited or a check is issued, the government loses control over how it is spent. However, digital currencies, especially with smart contracts, enable governments to direct spending to specific entities. Through smart contracts, it becomes possible to restrict the use of funds to local retailers, ensuring economic support for the local community.

Making Stimulus Money Effective

Digital currencies offer a profound advantage related to the effectiveness of stimulus money. Economic theory suggests that increasing the money supply should lead to significant economic growth. However, during the 2008 financial crisis, the actual impact was muted due to a decline in velocity—the speed at which money circulates. Digital currencies can address this by leveraging smart contracts to incentivize spending and maintain velocity, ensuring the intended impact of stimulus funds.

Understanding Velocity and Its Significance

Velocity of money refers to how quickly money circulates in an economy. During crises, people tend to favor holding onto money rather than using it for transactions, reducing velocity. This reduction in velocity diminishes the impact of injecting money into the economy. By utilizing digital currencies and real-time insights, policymakers can monitor and influence velocity, enabling more effective monetary policy implementation.

Audibility and Distribution

Digital currencies, particularly those built on blockchain technology, offer increased audibility. Transactions and data on a blockchain are visible, allowing for greater transparency and accountability. However, concerns about privacy and the distribution of a digital dollar need to be addressed to ensure widespread adoption and acceptance.

Conclusion and Q&A

The speaker concludes the presentation by emphasizing the potential of digital currencies, especially CBDCs, in influencing velocity and making stimulus money more effective. They highlight the ability to direct spending, reduce costs, and increase transparency. In the Q&A session, questions are raised regarding audibility, distribution, and previous initiatives like Japan’s time-limited shopping coupons.