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Bailouts, CBDCs and Branded Currencies Tangible Solutions Amidst Global Crisis

“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”the famous words inscribed into the Bitcoin genesis block are relevant once again, as a 2 trillion dollar stimulus package is signed into law. Born out of the 2008 financial crisis, Bitcoin provided people with a form of money outside of traditional financial systems, where they were no longer at the mercy of the institutions that had failed the public.  COVID-19 has caused a global shutdown, impacting economies worldwide that many could argue already stood in the shadow of a looming recession.  Sans the virus, the conditions we find ourselves in today are not drastically dissimilar to those in which Bitcoin began. The nascent technology finds itself facing its sophomore recession – begging the question, what is the value of blockchain and digital assets during times of financial downturn?

Bailout & Stimulus Accountability

The 2009 automotive bailout only propped up weak businesses at the expense of better-run competitors. It diverted taxes paid by other businesses and taxpayers at large to GM and Chrysler.  They received $13.7 billion, but long-term job numbers plummeted: by 2013 there were 3,000 less jobs. Last year, in Alberta, CA, the government failed to support clean energy industries, cancelled rebate programs for energy efficiency upgrades and scrapped renewable electricity programs, creating uncertainty for former oil and gas workers transitioning to jobs in the solar sector. Now, during the COVID-19 times, Ottawa is discussing a $15 billion aid package.  But the reality is that it may primarily benefit large players at the expense of pushing smaller companies into oblivion. 

In 2008 the US government set up $700 billion in Troubled Asset Relief Program to purchase toxic assets from banks during the subprime mortgage crisis.  The bailout ultimately exceeded initial stimulus, with total commitment standing at $16.8 trillion, with $4.6 trillion paid out while many people were not aware.  Banks would leverage some of this capital to finance mergers that ultimately created an oligolopy.  Now we see the US government attempts to rescue the airline industry with a $50 billion check amidst the coronavirus pandemic, but the industry shareholders won’t be saved, says senator Durbin.   

Talk of bailouts and unlimited quantitative easing is enough to stir memories of the Great Recession.  The acquisition of toxic assets, inflated central bank balance sheets, financial support for businesses and industries sporting billions in valuations, all bring into question the reception and use of relief funds.  Blockchain allows for heightened levels of accountability, providing an immutable record of fund disbursement. Parameters can be set for the reception of relief funds, so that they are objectively distributed in an efficient manner once requirements are met, streamlining the distribution process (who is eligible, when are funds received and in what amounts) removing significant frictions, and providing assistance as soon as it is deemed necessary.

During crises-infused, express budget allocation, a public ledger provides the ability to efficiently apply audits for misuse of funds and designate requirements for their use – and is accessible to all involved parties and the general public.

Central Bank Digital Currencies & their Potential Role during Global Crises

Central Bank Digital Currencies (CBDCs) can leverage blockchain technology to quickly and effectively distribute relief funds, especially in times where physical delivery is not feasible.  Funds can be sent instantaneously and transparently to digital wallets, eliminating contamination risk. This also enhances accessibility, anyone with a SSN and internet access can get – helping to address issues such as those faced by the unbanked and people who lack a permanent residence.  

Digital dollars can drastically increase the speed and effectiveness of stimulus fund distribution on all levels, with additional levels of accountability and auditability when it comes to banks and institutions.  

About 70% of the world’s central banks are looking into CBDCs, 10% expect to introduce a CBDC in the next 1–3 years.  Not explicitly blockchain-based, however, they provide a gateway for introduction to digital currencies that could spur adoption of a wider range of digital assets, inclusive of cryptocurrencies. 

CBDCs issued to financial institutions or individuals, stand as Federal Bank liabilities owed to the issued party, contrary to many commercial banks that hold fractional reserves.  CBDC proponents say this emerging asset category can help conduct monetary and credit policy, promote financial stability, consumer protection, financial inclusion and cross-border payments.    

Branded Currencies During Financial Meltdown

Both brands and consumers face the strain of economic downturn.  As employment benefit applications hit record highs, consumers try to stretch budgets as far as possible, with brands left battling for the crumbs.  However, consumers do keep buying, they just buy smarter. Incentive schemes and loyalty programs become attractive means to increase purchasing power, as consumers search for better deals and increased value.  During the 2008 financial crisis, consumer participation in rewards programs rose nearly 20%!    

Branded currencies, such as loyalty and rewards points, represent billions of dollars in value, and can help to relieve financial pressure, especially during times of economic uncertainty.  However, many rewards programs are siloed and do not allow for cross-program value transfer, significantly reducing consumer engagement.  Blockchain protocols such as DigitalBits seek to increase the transfer and tradeabilty of points, allowing consumers to optimize consumption.  If allowed to flow freely, branded currencies can afford consumers more purchasing power, increase payment options for merchants, while allowing brands to realize significant benefits.      

In times of economic downturn, customer retention takes precedence over customer acquisition, as consumers cut spending and become more discerning with their disposable income.  Engaging loyalty programs demonstrate a focus on consumer value, and help to maintain market share. Attracting a new customer can cost up to 15 times more than retaining an existing customer – brands can be more cost-effective by targeting and servicing their loyal customer base.  Studies have shown that existing customers spend up to 66% more than new customers.  Effective rewards programs help to establish and maintain the relationship that exists between brands and consumers, and can help both to maximize value.

Further to this, DigitalBits has been active in the development of branded stablecoins, an emerging asset category that will allow for more efficient payments and transfers, as well as the better intake of consumer information, allowing for catered programs and promotions as consumers seek to maximize value.  Notably, Facebook and Walmart have both been exploring their own stablecoin options.  

Accountability, Efficiency, Utility

Blockchain technology has come a long way since Satoshi’s first move against institutions in 2008.  As uncertainty continues to build in the wake of COVID-19, the possibilities for the emerging technology appear to be endless.  Blockchain provided us with a way out when the Great Recession hit, and it seems this time it will play an even greater role. 

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