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Fed opens debate over possible digital currency

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The Federal Reserve has for the first time launched a period of debate and public comment on the introduction of a central bank digital currency, as it seeks to keep pace with global financial innovation and maintain the supremacy of the dollar.

“We look forward to engaging with the public, elected representatives, and a broad range of stakeholders as we examine the positives and negatives of a central bank digital currency [CBDC] in the United States,” Fed chair Jay Powell said in a statement.

The Fed had been hesitant to embrace a central bank digital currency in recent years, saying it would only do so if the benefits outweighed the costs. It has lagged behind authorities in China, which is piloting a digital renminbi. The European Central Bank has also made inroads into the technology.

Powell has previously said any CBDC should serve “as a complement to, and not a replacement of, cash and current private-sector digital forms of the dollar, such as deposits at commercial banks”.

After months of anticipation, the Fed on Thursday released a lengthy discussion paper that will serve as the basis of what is expected to be a heated and consequential debate at the heart of the central bank in the coming months — though it made clear it did not “favour any policy outcome” at this point.

The Fed said: “While a CBDC could provide a safe, digital payment option for households and businesses as the payments system continues to evolve, and may result in faster payment options between countries, there may also be downsides.”

“They include how to ensure a CBDC would preserve monetary and financial stability as well as complement existing means of payment. Other key policy considerations include how to preserve the privacy of citizens and maintain the ability to combat illicit finance,” it added.

The Fed is asking for public comments on a potential CBDC over the next 120 days, and no decisions have yet been made about how it will be structured or if it will be rolled out.

In the discussion paper, the central bank noted that inaction on developing a digital US currency might erode the country’s supremacy in global markets.

“It is important . . . to consider the implications of a potential future state in which many foreign countries and currency unions may have introduced CBDCs,” the Fed said. “Some have suggested that, if these new CBDCs were more attractive than existing forms of the US dollar, global use of the dollar could decrease — and a US CBDC might help preserve the international role of the dollar,” it added.



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Economy

Can Russia be made to pay for Ukraine?

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When US Treasury secretary Janet Yellen meets her counterparts in Brussels on Tuesday, one big topic for discussion will be how to fund a country battered by war. While the immediate concern is covering Ukraine’s short-term financing needs, officials are also increasingly worried about a reconstruction bill that is heading above half a trillion euros.

Some are now tempted to use the roughly $300bn of Russian foreign exchange reserves frozen when the EU, the US and their allies imposed sanctions on the country’s central bank. Josep Borrell, the EU’s top diplomat, this month called for the assets of the Russian state to be directly targeted, saying such a move would be “full of logic” given the enormous cost.

But confiscating foreign governments’ assets would be fraught with risk and legally questionable, according to some scholars. As the US Treasury secretary put it last month, using Moscow’s reserves to fund rebuilding is not something to consider “lightly”.

Why would such a move be seen as incendiary?

Governments around the world hold the bulk of their wealth in dollars and euros. Beijing, for instance, is one of the biggest holders of US Treasuries in the world.

The decision to freeze Russia’s assets has already raised concern in states with tense relations with the US and Europe. An outright seizure of Moscow’s wealth would be viewed as crossing a political Rubicon. “It would essentially be an action that does away with the international political economy system we have set up over [recent] decades,” said Simon Hinrichsen, a visiting fellow at the London School of Economics.

In a blog post published by the Bruegel think-tank on Monday, Nicolas Véron and Joshua Kirschenbaum argued that while the idea of seizing the assets was “seductive”, it was also “unnecessary and unwise”.

“Credibly standing for a rules-based order is worth more than the billions that would be gained from appropriating Russia’s money,” they said. “Countries place their reserves in other countries trusting they will not be expropriated in situations short of being at war with each other.”

The possibility of leaving the reserves frozen and later returning them to Moscow was also “a powerful bargaining chip” for Kyiv, the two authors said.

What is the US’s stance?

Yellen has said making Russia pay for rebuilding is something that the authorities “ought to be pursuing”, though the Treasury secretary has cautioned that doing so would require changes in US law and require the support of US allies.

In the new $40bn aid package for Ukraine that is making its way through Congress, the Biden administration has proposed measures that would make it easier and faster for the government to seize assets linked to Russian “kleptocrats”.

The Biden administration has form in seizing governments’ assets: earlier this year the president ordered some of the Afghan central bank’s wealth that was parked in accounts in the US to be used for humanitarian assistance. Still, doing the same in the case of Russia would involve surmounting significant legal obstacles.

What do lawyers think?

International law recognises that the assets of convicted war criminals can be seized in reparations to their victims. In 2017 Hissène Habré, the former president of Chad, was ordered by a special war crimes tribunal to pay more than $145mn to victims of abuses under his rule. However, Habré died last year without his victims seeing compensation.

There was more success in the case of Iraq, where the country’s government has paid $52bn to victims of Saddam Hussein’s invasion of Kuwait. The last payment, funded by oil sales and backed by the UN, was made earlier this year.

With Ukraine, the scale of the asset freezes already targeting Russia is a clear advantage. But the assets remain the property of Moscow under US law. Lee Buchheit, a veteran lawyer of international finance, said the US president was likely to need an act of Congress to change that. “The issue is whether they can take the next step and actually confiscate [the assets],” said Buchheit. “It is highly likely to happen, because the political pressure on western leaders is building to take this step.”

However Véron and Kirschenbaum argue that, even if Congress passes new legislation, it could be found to be unconstitutional in future court cases. “Such an aggressive expansion of executive powers might even cause the US judiciary to revisit the deference it has historically granted the government when exercising blocking or other sanctions authorities,” they said.

What other ways are there to make Russia pay?

Confiscating assets of wealthy individuals is one route.

The Biden plan has bipartisan support, with both Republican Lindsey Graham and Democrat Richard Blumenthal championing it in the Senate.

The EU has set up a so-called freeze-and-seize task force which is examining whether to take a similar approach to the US — as are officials in the European Commission’s justice directorate. One stumbling block is that asset confiscation is subject to strict legal limits in member states, and in many (although not all) cases it can only happen following a criminal conviction of the owner of the relevant property.

To overcome this, the commission is working on measures to clarify that evasion of sanctions — for example, by moving assets to another jurisdiction — is itself a criminal offence, facilitating the confiscation of the assets by the authorities.

But, compared with the vast wealth of the Russian central bank, the assets of the oligarchs are relatively small and would leave the allies with a massive gap to plug in the reconstruction bill.



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Beware the promise of salary advance schemes

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High energy and food prices are particularly bad news for people who live from one payday to the next. In the UK, about 22 per cent of adults have less than £100 in savings, according to a government-backed survey. In the US, about 20 per cent of households say they could only cover their expenses for two weeks or less if they lost their income, according to the consumer protection regulator.

In this context, many employers are keen to do something to help their staff become more “financially resilient”. One increasingly popular idea is to partner with companies which provide “earned wage access” or “early salary advance scheme” products. These companies connect with an employer’s payroll to let employees draw down some of their forthcoming pay packet in advance.

The companies usually charge a fee per transaction (generally between £1 and £2 in the UK) which is paid by the employee or the employer. The products are largely unregulated because they are not seen as loans. They are proliferating in the UK, the US and a number of countries in Asia such as Singapore and Indonesia.

Revolut, the UK-based banking app, has also entered the market, telling employers it is a way to “empower employee financial wellbeing, at no cost to you”. Data is scarce, but research company Aite-Novarica estimates that $9.5bn in wages were accessed early in the US in 2020, up from $3.2bn in 2018.

In a world where many employers don’t offer ad hoc advances to employees any more, these products can help staff cope with unexpected financial emergencies without having to resort to expensive payday loans. Some of the apps like UK-based Wagestream, whose financial backers include some charities, combine it with a suite of other services like financial coaching and savings. There is also value in the clear information some of these apps supply to workers about how much they are earning, especially for shift workers.

But for companies which don’t offer these wider services, there is a question about whether payday advances really promote financial resilience. If you take from the next pay cheque, there is a risk you will come up short again the following month.

Data from the Financial Conduct Authority, a UK regulator, suggests users take advances between one and three times per month on average. While data shared by Wagestream shows 62 per cent of its users don’t make use of the salary advance option at all, 20 per cent tap it one to two times per month, 9 per cent tap it four to six times and 9 per cent tap it seven or more times.

As well as the risk of becoming trapped in a cycle, if you are paying a flat fee per transaction the cost can soon add up. The FCA has warned there is a “risk that employees might not appreciate the true cost” compared to credit products with interest rates.

Against that, Wagestream told me frequent users weren’t necessarily in financial distress. Some users are part-time shift workers who simply want to be paid after every shift, for example. Others seem to want to create a weekly pay cycle for themselves.

Wagestream users on average transfer lower amounts less often after a year. The company’s “end goal” is that all fees are covered by employers rather than workers. Some employers do this already; others are planning to as the cost of living rises.

Regulators have noticed the market but haven’t got involved yet. In the UK, the FCA’s Woolard review last year “identified a number of risks of harm associated with use of these products”, but didn’t find evidence of “crystallisation or widespread consumer detriment”. In the US, the Consumer Financial Protection Bureau is expected to look again at the question of whether any of these products should be treated as loans.

A good place to start for regulators would be to gather better data on the scale of the market and the ways in which people are using it.

Employers, meanwhile, should be wary of the idea they can deliver “financial wellbeing” on the cheap. Companies that believe in the value of these products should cover the fees and keep an eye on the way staff are using them. They could also offer payroll savings schemes to help people develop a financial cushion for the future. Nest, the UK state-backed pension fund, has just concluded an encouraging trial of an “opt out” approach to employee savings funds.

If employers don’t want to go down that road, there is a perfectly good alternative: pay staff a decent living wage and leave them to it.

sarah.oconnor@ft.com



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Jeff Bezos turns up heat on Joe Biden over US inflation

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Jeff Bezos lashed out at Joe Biden’s White House on Monday over policies he claimed risked stoking inflation, escalating a war of words over the cause of sharply rising prices that are dominating US politics in an election year.

The Amazon founder and world’s third-richest person took aim at the Biden administration’s failed Build Back Better bill, which would have increased taxes on the wealthy and large companies to pay for spending on childcare, education and programmes to curb climate change.

“Administration tried their best to add another $3.5tn to federal spending,” Bezos wrote on Twitter. “They failed, but if they had succeeded, inflation would be even higher than it is today, and inflation today is at a 40-year high.”

Bezos’s attack was an uncharacteristic outburst for one of the world’s best-known businesspeople, who has not previously used Twitter to wade into contentious political disputes.

It followed a back-and-forth with the White House that began on Friday, when Bezos criticised a tweet from Biden that suggested one reason inflation had taken off was that wealthy companies did not pay enough in tax. Bezos retorted that while high inflation and the level of taxes paid by companies were issues that deserved to be discussed, linking the two was a “non sequitur” that should be put before “the newly created Disinformation Board”.

The White House reacted scathingly to the Bezos tweets. “It doesn’t require a huge leap to figure out why one of the wealthiest individuals on Earth opposes an economic agenda for the middle class that cuts some of the biggest costs families face, fights inflation for the long haul and adds to the historic deficit reduction the President is achieving by asking the richest taxpayers and corporations to pay their fair share,” a spokesperson said.

Bezos also came under fire on Monday from Lawrence Summers, the former US Treasury secretary, who broke with most economists early last year to start warning about the rising risk of inflation. Summers called the tech entrepreneur “mostly wrong”, adding that it was “perfectly reasonable to believe . . . that we should raise taxes to reduce demand to contain inflation and that the increases should be as progressive as possible”.

Tensions between Bezos and the White House have been exacerbated by the president’s support for organised labour, including unionisation efforts at Amazon that have been building since Biden took office 18 months ago. “It’s also unsurprising that this tweet comes after the President met with labour organisers, including Amazon employees,” the White House spokesperson said.

Since stepping down as chief executive of Amazon last year, Bezos has become increasingly active on Twitter and used it to make occasional barbed asides related to his personal views, though not with the frequency or vehemence of rival tech billionaire Elon Musk.

Last month, Bezos suggested that Tesla’s heavy dependence on sales to China could give the Chinese government leverage to force Musk to bow to censorship after his planned purchase of Twitter.

As with Musk, Bezos has shown libertarian political instincts and once waged a bitter fight with Amazon’s home city of Seattle over a proposed tax increase. Amazon has also long resisted unionisation by its employees, putting it at odds with the Biden administration.

However, Bezos has also at times backed liberal causes, including donating heavily to defend same-sex marriage in Washington state and hiring Jay Carney, a former press secretary in the Obama White House, to head public policy and communications at Amazon.

The public spat between Bezos and the White House was symptomatic of broader frictions between business and the Biden administration and Democratic lawmakers over inflation, with some officials blaming corporate America for price-gouging and taking advantage of rising prices at the expense of ordinary consumers.

However, most economists said inflationary pressures were due to a combination of factors including high demand driven by government stimulus and the rebound from the coronavirus pandemic downturn, as well as the oil price shock exacerbated by the war in Ukraine and supply chain bottlenecks that have been more persistent than expected.





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