With unemployment surging and businesses struggling under lockdown, millions of Americans are relying on the extra benefits payments issued under the $2.2 trillion dollar Coronavirus Aid, Relief and Economic Security (Cares) Act. Yet, amid threats of utility shut-offs and housing and food insecurity, an alarming proportion are still waiting for their relief checks.
Hold-ups in issuing paper checks, payments sent to the wrong or nonexistent bank accounts, omissions of the additional $500 per child, and similar mistakes are the result of technical and human flaws in the aid distribution process the Internal Revenue Service uses, primarily outdated software systems and inaccurate data.
The US desperately needs to learn from innovation elsewhere. The UN's World Food Program, for example, is urgently distributing vouchers and cash transfers to over 100,000 Syrian refugees in Jordan using the blockchain-based Building Blocks platform. The program also recently launched in Bangladesh, where there are an estimated 900,000 displaced Rohingya people.
Oxfam transfers digital money to thousands in need of relief in Syria, Greece, Kenya, Australia, and the cyclone-prone island of Vanuatu via SMS, an Android phone app, or an NFC card—a kind of contactless payments card that also acts as proof of ID.
These applications, in Oxfam’s case the Sempo Cash and Voucher Assistance program, have proven capable of disbursing tens of thousands of dollars at a time to many beneficiaries within minutes—at a near negligible cost. Successfully trialled and implemented by the humanitarian sector, efficient, secure, and resilient systems are overdue in America's federal and financial infrastructure.
From Refugee Camps to IRS
While the numbers and challenges are on a different scale in America's current crisis, the US can learn important lessons from solutions deployed in challenging humanitarian environments like refugee camps. Weaknesses in current US benefits distribution systems render them ill-equipped to handle the scale, complexity, and timeframes now needed.
The most obvious and fundamental benefit of innovative direct aid distribution solutions is the ability to send payments between parties within seconds. For digital cash solutions built on blockchains, there is also an immutable record of each transaction. Information, for example details of payment recipients, would be automatically verified and updated without being tied to specific bank accounts. This would avoid the type of problem faced by the IRS last month when 300,000 deposits were erroneously made to nonexistent temporary bank accounts and other payments were not processed at all since individuals’ bank account information had changed or could not be retrieved.
Decentralized networks move money without ever touching a commercial bank, reducing settlement time from days to minutes or seconds. Importantly, solutions like those deployed by Oxfam and the UN’s World Food Program prove that individuals can easily and verifiably receive aid from their local government or an NGO with as little as a cell phone number; sometimes not even that is necessary.
Recovering $50 billion
For the US, the first step is for the Federal Reserve to introduce a “digital dollar.” Central Banks and governments around the world have been accelerating requests for proposals on central bank-backed digital currencies, or CBDCs. The Bank of International Settlements recently noted that the pandemic “may put calls for CBDCs into sharper focus, highlighting the value of having access to diverse means of payment, and the need for any means of payments to be resilient against a broad range of threats.”
CBDCs, such as a digital dollar, would serve the 70 million unbanked Americans who are currently waiting weeks for paper relief checks to arrive. US Post Offices in remote locations could verify identity credentials, while connecting customers to low-cost financial services such as check cashing, bill payments, and savings accounts. In fact, this type of mechanism was advanced by the House of Representatives last year in a bipartisan amendment to increase financial inclusion.
Disaster relief agencies have designed their voucher schemes with the unbanked and unconnected user in mind. Similar solutions for the US benefits system would equally serve America’s unbanked population, as well as reduce fees to commercial banks and avoid related losses from inefficient payments.
By contrast, the financial infrastructure used globally to disseminate governmental payments—ACH transfers—is costly, slow, and reliant on banks. Some ACH payment providers charge a flat fee, ranging from around 20 cents to $1.50 per transaction; others charge from around 0.5 to 1.5 percent. If these costs aren’t waived, the US government might have to spend between $48 million and $359 million of capital reserved for life-saving aid just on transaction fees, based on 128.6 million families and 110.6 million single adults potentially eligible for disbursements.
For the 25 percent of US households that are unbanked or underbanked, the government would potentially need to pay an additional $3 per paper check sent, totaling $165 million, increasing the total cost of relief check distribution to between $50 million and $500 million.
To put it another way, if US Covid-19 relief could have been sent out using blockchain-based digital dollars, the Treasury would be recovering 0.25 to 2.5 percent of the total relief package—or up to $50 billion—by saving on fees and transaction costs.
Urgent Need for Digital Cash
In times of crisis, innovations such as those deployed in disaster-relief work take on new potency.
The Cares Act originally highlighted the urgent need for digital cash in disseminating checks. While this was cut from the final legislation, several other proposals in Congress have recognized the urgency for new digital solutions to deliver economic relief.
US representative Rashida Tlaib proposed the Automatic Boost to Communities Act, for example, which included mention of a “Treasury-administered digital public currency wallet system.” The Financial Services Committee chair, Maxine Waters, proposed creation of “digital dollar wallets” in her proposed bill to deliver the economic payments.
The emerging technology behind humanitarian aid applications offers tools for cost-effective, fast, and transparent disbursement of economic aid to the world’s most vulnerable communities during the Covid-19 pandemic. Through smart collaboration between fintechs, governments, and nonprofits, more people could be getting the lifeline they need quickly enough to prevent unnecessary suffering, and minimizing our collective economic toll.
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