What Is It, and Why Do We Need It?
Retail CBDC is an electronic form of government-issued money or cash that can be directly spent by individual citizens. In our context, cashback presents households’ ability to receive such moneys as if effectively a discount to subsidise and incentivise consumption expenditure.
In times of economic crisis, there have historically been two tools available to provide economic stimulus, namely those of fiscal and monetary policies. When it comes to targeting inflation, at least in the Western part of the world, low interest rates have been at the core of such policies, to the extent of reaching the Zero Lower Bound and thereby limiting the capacity to stimulate economic growth.
To make things worse, economic shocks such as presented by COVID-19 have led to varying signals and economic effects for different sectors and industries. With an inability to discriminate between or target certain areas and fields, consumption expenditure has led to asymmetric shocks and government support at unsustainable levels.
Rather than providing injections by investment, as would be facilitated by fiscal policy, electronic cashback provides economic stimulus through consumption expenditure. The authors of the suggested economic concept and solution, by modelling consumer behaviour against varying time frames and opportunity costs, explain how different cashback rates can help optimise consumer utility and spark economic growth. Accounting for sticky prices, the solution is not predicted to lead to countering negative effects in terms of longer-term economic development. Instead, by allowing it to be sector-specific, the model suggests an ability to provide countering asymmetric policy that serves to rebalance the economy at more efficient and sustainable rates.
A Blockchain-Enabled Solution
The solution is made possible by the feasibility and interoperability provided by building on top of a blockchain protocol and network that can cater for small casual transactions at unbounded rates, whilst protecting the privacy of individual consumers. At the same time, the authors see an opportunity to perform data analytics in a way that would otherwise not be possible and that allows for increasingly targeted and automated economic stimulus, as nChain Researchers explain:
One aspect of the proposed solution that is perhaps less talked about is the ability to perform an analysis of economic data at an effectively incremental and instantaneous rate. In other words, we no longer need to be confined to the survey data as a proxy for inflation, but can now monitor price developments to better reflect economic realities and target individual sectors accordingly, in a more seamless manner.
nChain is already at work to implement the foundation necessary for such solutions, and recently proposed a design and concept for a National Digital Ledger and electronic cash management system for the island nation of Tuvalu.