Föhrenbergkreis Finanzwirtschaft

Unkonventionelle Lösungen für eine zukunftsfähige Gesellschaft

Cryptocurrency to the Rescue

Posted by hkarner - 20. Juli 2019

Date: 19-07-2019
Source: The Wall Street Journal By The Editorial Board

Facebook’s Libra could help the poor who lost credit after Dodd-Frank.

Members of Congress this week lashed Facebook over its plans to create a new cryptocurrency that ostensibly aims to serve low-income folks and fill a market need that Democrats created in 2010 with the Dodd-Frank Act. Here is a parable of regulatory unintended consequences.

Facebook says its cryptocurrency Libra, which it claims will be based on blockchain technology, is intended to reduce friction in the financial system and serve people who don’t have access to traditional banking. Customers could store money and make online payments with its digital wallet that would operate like a checking account without fees and minimum-balance rules.

Unlike Bitcoin and other cryptocurrencies, Libra would be backed by a reserve fund of short-dated securities from stable governments. While Libra’s value might fluctuate over time against a specific fiat currency, it wouldn’t depreciate since an “association” of businesses, nonprofits and academic institutions would only mint new coins as demand for Libra increases.

Banking regulators including Federal Reserve Chair Jerome Powell have raised concerns that Facebook’s cryptocurrency could facilitate money laundering. Members of Congress this week also questioned whether the social network could be trusted to protect customer privacy given its history of lapses.

Fair enough, but the main beneficiaries at least in the U.S. could be low-income Americans shut out of the banking system. Thank Dodd-Frank’s Durbin Amendment, which capped fees that banks can charge merchants on debit-card swipes. Democrats claimed this would reduce consumer costs, but copious economic literature shows it has done the opposite.

Banks predictably offset income they lost due to the swipe-fee cap by raising fees on checking accounts and steering customers to credit cards. A University of Pennsylvania study this year found the fee cap caused the share of free checking accounts to fall by 40 percentage points and the average monthly fee to increase about 70%. Monthly minimum balances rose 25%.

George Mason University professor Todd Zywicki has estimated that the rule raised costs on average for low-income bank customers $160 a year. According to a Federal Deposit Insurance Corporation survey, the number of unbanked households increased by a million between 2009 and 2011. Many more have since lost access.

Other studies have found that merchants didn’t pass on savings from lower swipe fees to customers, and large retailers pocketed the most. In other words, the Durbin Amendment was an income transfer from low-income Americans to big corporations.

“From a policy perspective, our results should caution those who are enthusiastic about the potential of price regulation to enhance consumer welfare,” the Penn study noted in an understatement for the ages.

Many banks dropped reward programs on debit cards and instead sweetened incentives for customers to rack up spending on credit cards that aren’t subject to the Durbin Amendment. As a result, customers are using credit cards more though they may incur higher fees and interest payments.

Banks noted during their quarterly earnings reports this week that credit cards are driving profit growth amid a slump in trading revenues. At J.P. Morgan Chase, credit-card spending surged 11% while account balances rose 8%. “People like their credit cards,” CEO Jaime Dimon said. “They use their credit cards more than they use their debit cards.”

Yet many low-income Americans don’t qualify for credit cards, and the “unbanked” typically rely on check cashers and payday lenders, who Democrats want to regulate out of business. Amazon last month floated a credit card that would require a security deposit for low-income Americans who want to rebuild their credit standing, but some Democrats want to ban that too.

Facebook’s cryptocurrency ecosystem needs to be fleshed out and potential weaknesses explored. But it could provide low-income Americans with a cheap banking alternative and perhaps put pressure on banks to lower fees. Will regulators and politicians allow it?

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