It’s time to digitize our money and democratize finance.
Suppose you wanted to make a payment to a friend who had looked after your home while you had been traveling, or to a neighborhood store where you regularly shopped, or to a parking meter while out, or to a tax authority in April, or to a firm or some other productive unit in which you’d long wished to invest. Or suppose you are owed in the form of a refund on some recent payment, or are awaiting a paycheck, or are borrowing from a bank to start up a new business, or to grow a business you already operate.
Today, you would have to conduct these multiple transactions over multiple “platforms” or “networks.” And, correspondingly, they’d require multiple “payment media” to proceed. You might pay your house-sitting friend in paper currency or over Venmo, say, then use a chip card or strip card at the shop, slip coins or a voucher into a parking meter, and send a check to a broker or tax authority. Your refund, in turn, might come as a check or direct deposit into a bank account you maintain; your wage or salary as paper; and your loan or other investment as a cashier’s check or an account opened for you by a commercial bank or investment fund.
These “polyglot” means of paying and being paid complicate your life in multiple ways. To begin with, you are obliged to carry multiple tokens or other objects around with you, and to memorize multiple passwords and PIN numbers. Beyond that, the security and privacy afforded by many of these payment media will differ from that afforded by others. Finally, and perhaps worst of all, in some cases your payments won’t “clear” until some lag-time after they “post.” What is called “settlement” of your transactions will frequently not happen “in real time.”
These are only the most obvious worries or inconveniences of our “Babel” of parallel payment systems. In many jurisdictions, especially the U.S., payments made other than in cash require the use of bank transaction accounts—the accounts with which chip cards and strip cards, not to mention most payment platforms like Zelle, Venmo, and PayPal, are often associated. Yet these accounts can be difficult to open and maintain, particularly for those who aren’t wealthy and can’t afford the fees that banks and platform companies charge.
One result is that some 25% of the citizenry of what we are constantly told is “the wealthiest country in the world”—the United States—are “unbanked” or “underbanked.” Small businesses don’t fare much better: the “interchange” and related fees that bodegas and local shops have to pay to facilitate electronic payments are prohibitive for many.
That’s a bit odd in a “commercial republic” like that which the U.S. purports to be, let alone any “monetary exchange economy” like that of most “developed” countries. In such republics, value-transfer and value-storage systems—that is, payment and savings platforms—surely amount to essential commercial and financial infrastructures. They are “public goods” that by definition should be widely and freely available to all.
But this is not so. Thanks to the intimate link between money and payment systems, modern commercial republics like the U.S. must modulate transaction activity—that is, “money supplies” and “money velocity”—to manage “price stability” and “financial stability”—that is, “inflation” and “deflation,” “bubbles” and “busts.” Where payment systems make use of intermediaries—banks, payment platform companies, etc.—the authorities charged with this form of maintenance must accordingly work through “middleman” institutions—commercial banks, “dealer” banks, and the like. This brings much leakage to credit and monetary policy, diminishing efficacy both in inflationary booms and in deflationary busts. Where public infrastructure is captive to private toll-takers, public action is hostage to private interest.
Now imagine a simpler, more elegant, more streamlined value-storage and value-transfer architecture…
Your iPhone or iPad or other “smart device” holds a digital wallet, which is networked both horizontally to all other citizens’ and businesses’ wallets and vertically to the republic’s fiscal and/or monetary authorities—its finance ministry and/or its central bank. To make payments to friends, employees, businesses, tax authorities, materials suppliers or anyone else in their personal or professional capacities, you simply credit their wallets while debiting yours. Payments to you or your business take the same form—creditings of your wallet and corresponding debitings of your payors’ wallets, all unlagged “in real time.”
Your wallet also serves as a value-storage device—a personal and/or professional digital “savings account.” The fiscal or monetary authority might even pay interest on our wallet accounts—as central banks do now on privileged private sector banks’ “reserve accounts,” and as finance ministries do on the sovereign debt instruments—e.g., U.S. Treasury “bonds,” “bills,” and “notes”—that so many of their citizens (perhaps you yourself) purchase as safe savings vehicles. These rates then can be raised or lowered to encourage more or less saving according as the republic’s monetary and fiscal agencies must encourage slower spending to lower inflation or accelerated spending to counteract deflation—“recession” or “depression.” Leak-proof monetary policy.
What is more, because smart device ownership is far more universal than bank account ownership—in the U.S., for example, only 5%, not 25%, of the population is “unphoned,” while in Ethiopia most have phones but there are few “brick and mortar” banks—the problem of the “unbanked” and “underbanked” is all but eliminated. Network fees paid by businesses, meanwhile, disappear. In “developing” countries, relatedly, full banking and payment systems can be had without trudging through the decades of slow steps the “developed” world had to traverse to establish full national banking and investment systems.
And there is yet more: communities that find sundry forms of unremunerated “care work” to contribute to aggregate wealth and hence public revenue over time—a secondary schooler tutoring primary schoolers in algebra, for example, or a young person giving home care to an older person—can encourage more such work by remunerating it over smart devices. The “proof of work” (“POW”) protocols that new digital payment technologies enable can, complementarily, ensure that real services—socially value adding services—are performed for these remunerations.
The same technologies that enable this also afford means of cryptographically protecting individuals’ and businesses’ digital identities and transactional privacy. The payment architecture can be programmed to replicate the privacy advantages now offered only by cash, while capturing the security advantages offered only by electronic networking. Digitization, in other words, can be made “all good,” with no offsetting “bad with the good” disadvantages or “tradeoffs.”
In effect, what we’re imagining here is a full digital infrastructure that isomorphically mirrors the underlying credit and debit (asset and liability) structures of all modern productive commercial societies. Legally and institutionally speaking, all modern economies amount to massive social balance sheets, on which comprehensive “double-entry book-keeping” would include every public and private unit’s debts and entitlements, all interlinked liability and asset structures. No actually tabulated balance sheet quite does this, of course (though central bank records quite nearly do it), but this is nevertheless the legal, monetary, and financial structure of all commercial societies—including most of the societies of modern Africa, Asia, Europe, Oceania, and the Americas—established since the late medieval or early modern eras.
Present-day payment and value-accounting practices obscure this underlying shared structure. In so doing they enable all manner of inefficiency and rent-extraction, as multiple for-profit entities purport to offer—for a price—bits and pieces of a dismembered commercial and financial infrastructure that should be—and can be—made freely available to all. The upshot is intolerable injustice and massively scandalous waste.
It doesn’t have to be this way. And in a new book, I both show this and design an alternative in detail.
While our present-day value-accounting, value-storage, and value-transfer systems are understandable outgrowths of an earlier time when the state of technology simply didn’t allow for comprehensive account-keeping across whole economies, that earlier time is now well past. New modes of data-compiling, -storing, and -collating allow for construction of literal physical ledgers in electronic digital form, ledgers that replicate the de facto ledgers that are all of our modern commercial and financial economies’ fund-stocks (“savings”) and fund-flows (“payments”). Hence my book’s title: The Citizens’ Ledger: Digitizing Our Money, Democratizing Our Finance.
Something much like this compiling and tracking is done by central banks worldwide already. For it is the only way they can fulfill their public money-management mandates not “in the dark,” but transparently, with full knowledge, “in the full light of day.” But what our public instrumentalities—our central banks and finance ministries—benefit by, we the citizens should benefit by too. Since they, our public agents, “keep” economy-wide macro ledgers, we, their principals, ought to be able to use these ledgers—to save and to spend, to invest and be invested in, through them.
Happily, the new savings and payments technologies discussed in my book will enable just that. They will enable our savings and payments, and hence our investment, modalities to catch up with our computing and communications modalities. That will convey the productivity and efficiency gains wrought by the latter to our practices and infrastructures that make up the former.
We must act now, however. The rent-taking middleman institutions that have benefited by the old regime see the threats posed to their oligopoly by the emerging regime I describe here. They’re therefore acting quite swiftly to see to it that the public efficiencies offered by new technology remain restricted, for-profit, and expensive. Too many central banks, for their part, seem to be willing to kowtow to these interests as they now begin upgrading their national payments systems with the new technologies.
When you read or hear references to “central bank digital currencies” or “CBDC,” as we’re all seeing and hearing now more or less every day, this is what lies in the background. It is the task and the hope of my book to indicate both why we must keep paying attention, and how we should weigh-in. For it is ultimately about what to demand as a citizenry—the citizenry of a free and productive commercial republic.
ROBERT HOCKETT is the Edward Cornell Professor of Law & Finance at Cornell Law School, Adjunct Professor of Finance at Georgetown University's McDonough School of Business, and Senior Counsel at Westwood Capital, LLC in New York.