Note: As part of the Central Bank of the Future research project, we asked a few people to help us think big in reimagining the Central Bank of 2070. What underlying assumptions would have to change to foster economic inclusion? This post is the first article in our "What If...?" blog series.
In the U.S., the focus of central banking is still on historical policy mandates using the same economic levers that have been used for decades. As a result, many markets have leapfrogged the U.S. in central banking innovation. The Federal Reserve, built for a paper currency world, has not expanded significantly to be inclusive of either technology changes or societal inequality enabled by the banking system.
The Fed has a unique opportunity right now to accelerate innovation alongside a fundamentally different goal: to help rebuild the U.S. economy with opportunities for all Americans. These past few months have shown that when you expand the lending capacity of the central bank and spend billions of dollars stimulating an economy – the markets will stabilize. But the markets are not representative of the true driver of the U.S. GDP – the U.S. consumer – so a much broader approach needs to be taken.
In the future, the underlying monetary policies that provide liquidity and control inflation must be augmented with five interrelated practices, grounded in data and financial health, creating a broader and more inclusive remit for the Fed:
Identity: Digital identity for the purpose of identification, payments and data autonomy. Currently, last generation identifiers (SSNs) and blunt force verification methodologies (MFAs) are the default solution. The regulatory load of AML and KYC have not done enough to prevent fraud and there is no one authority that has a verifiable sovereign view of a person’s identity.
Data Ownership & Governance: A person’s data is a fundamental aspect of their identity and they should own it and be able to access it freely and securely. If a central bank can be a fiduciary of your money, why can’t they be a fiduciary of your data too? The day will come where we can exchange our data for value, with transparent terms and fair value. This exchange should be a function of central banking and the Fed.
Digital Currency: Considering digital currencies less as a form of fiat currency and more as a mechanism for traceability and real time payments should be a fundamental driver of innovation at the Fed. Imagine how much more streamlined the recent PPP applications and compliance would have been if stimulus was issued in digital currencies to show that the funds went to their intended audience.
Real Time Payments: For the U.S. GDP to continue to grow, the economy must be supported by payment rails that enable a faster monetary flow. Communication and innovation currently move much faster than money can move. Accelerate the flow of payments, settlements, identity verification and money movement, and we can collectively make faster, more informed decisions.
Financial Soundness: Last, and most importantly – the Fed should expand (and perhaps relate) indicators of liquidity and reserve requirements to include key ratios of an institution’s customers' financial health. An institution could show over time if their customers are financially healthier, or less healthy in aggregate and by segment. Providing liquidity on positive customer outcomes would be a fundamental driver of improving financial health across the board.
As an ecosystem, we have collectively conflated financial soundness with liquidity and credit availability with economic opportunity and financial health. More policies for enabling, promoting, and measuring financial health as a fundamental pillar of financial soundness of the economy are desperately needed.
Central banking can help solve for some of our most pressing systemic issues within the macroeconomic landscape by accelerating the velocity and efficiency of transactions AND creating more dynamic solutions for financial inclusion and wellness. Starting with a universal view of data & identity – and then driving innovation in financial health, digital currency and real time payments – will increase the Fed’s relevance and impact for this and the next century.
- Jane Barratt is the Chief Advocacy Officer of MX Technologies Inc., where she works with government, regulatory bodies, financial institutions, and industry groups to ensure people have secure access to their financial data.