Luohu district, located in the city of Shenzhen, China, announced that 10 million digital renminpiao would be distributed in October 2020. Each digital renminpiao is equal to 200 USD; 50,000 people would receive one. Between October 12 and 18 2020, lucky recipients could spend their money at designated shops in the district. A similar announcement happened on January 11 2021 in Shenzen; citizens registered with the local government would receive their money that day and need to use it before January 17 2021.
Digital money can have a programmable monetary policy. When money is programmed to expire after a specific date, it becomes more useful as a monetary tool. This is because it can be quickly spent, which leads to an increase in consumption.
Giving out aid during economic downturns or other difficult times could be solved with the help of cryptocurrency. Since people are less likely to spend in high uncertainty, this is an extremely useful feature for governments and central banks to add.
Programmable money is money that can be intelligence-wise changed.
Digital currency comes with specific instructions on how to use it. For example, the US Federal Reserve and Deutsche Bundesbank have stated that digital currency can be used to transfer ownership, transfer value, or perform some other function. Other programmed uses of digital currency include expiration dates, specific dates for redemption, and so forth.
Digital cash can be programmed to perform many different tasks. These include performing math calculations automatically, charging different interest rates, setting conditions for money transfers, automating tax payments, and more. Cash can even be programmed to block certain individuals from accessing their funds or charging a specific rate on cash. This is similar to how digital blacklists work.
Digital money programmed to recognize payment conditions between different currency systems could automatically pay for things like milk and toner when a refrigerator runs low. Or, a printer could automatically buy toner from Amazon when it needs more. This is called the “Internet of Things”; machines connected to the internet that make buying orders and authorize payments when necessary.
Using smart contracts, automatic programs that enforce agreements or contracts, payments or values exchange can be triggered by specific circumstances. This is typically seen in cases where money or assets change hands automatically due to set conditions.
Smart contracts eliminate the need for trusted intermediaries and arbitration, reducing execution costs and fraud losses, and reducing the risk of malicious or accidental anomalies.
Programmable money could finally enable far-reaching scenarios where governments restrict access to scarce resources, dynamically charge based on electricity or toll road usage or measure carbon emissions, and attach pay-per-use systems to the case as described in Casey (2020) As discussed, it’s the house and the car.
Program Money Flow
These are all fun quirks, but does leaking money really work?
Expiring money increases the velocity of money and general economic activity, much like applying negative interest rates to digital cash. In practice, a fee for carrying money encourages people to spend it, preventing it from being charged.
In order for paper money to retain its face value, Silvio Gesell and economists wrote about currency in the early 20th century, proposing a weekly postage stamp paid by the bearer. Regular fees make holding that money expensive, forcing people to spend it quickly. The proposal was successfully implemented in the town of Wörgl (Austria) during the Great Depression of the 1930s – the devalued currency forced people to get rid of it by bartering in the market, which soon helped the local economy to prosper again.
In the case of currency maturities, the penalty for holding will be even more aggressive: the currency will retain its full value for a predetermined period of time after issuance, and then decrease in value. This form of programmable money would initiate a chain of spending decisions – since no holder would have reason to hold it beyond the maturity date –
Thereby permanently increasing aggregate demand (ceteris paribus).
However, for the money to be acceptable, the expiration mechanism should be designed around a “resettable timer” so that while the interval before expiration is fixed for each holder, the clock resets every time the money passes the hands set to zero. This will give its new holders a full time interval before the new expiration date begins. An automated alert system can notify holders of upcoming expiry dates.
Leakage of funds works differently than quantitative easing, the method by which central banks stimulate economic activity by buying securities and driving down interest rates. Leaving money would not affect aggregate demand indirectly through the Bank of England’s portfolio rebalancing or the neutral real interest rate channel discussed by Gertjan Vlieghe (2021), but would directly affect spending decisions by generating a positive wealth effect.
If not spent before maturity, the extra wealth will surely disappear and the wealth effect will be enhanced.
In our next post, we’ll explore some of the downsides of expired currencies, as well as the policy goals that might incentivize their use.
