Consumers are moving to online and mobile channels for their financial transactions and adopting a wide variety of new payment methods, from peer-to-peer (P2P) to e-wallets, to cryptocurrencies. What had once been a steady but slow migration was suddenly accelerated by the COVID-19 pandemic. As people stayed home to slow the spread of the virus, they were left with little choice but to conduct all aspects of their financial lives over digital and mobile channels.
As a result, banks and traditional financial institutions have been under pressure to digitally transform themselves in order to provide the digital services consumers need – but this rush exposed a porous financial infrastructure ripe for fraud and lacking in adequate regulations or standards designed for our new, digital era.
While banks work to digitally transform themselves, they have been hit with an overwhelming increase in fraud, as the federal government responded to the pandemic by allocating more than $1 trillion for expanded unemployment benefits, loans to small businesses, stimulus checks and more. New account fraud attempts more than doubled and demand deposit account fraud roughly tripled during the early days of the pandemic, according to one prominent study. The Federal Trade Commission reported more than 70,000 fraud reports related to COVID-19 stimulus funding in the first half of 2020.
With fraudsters overwhelming the system, financial institutions and government agencies have been forced to freeze funds while they work to distinguish the legitimate claims from the fraudulent, and to this day, millions of people are still waiting to receive their benefits.
The fastest, most efficient and cost-effective way to distribute relief funds would have been through the use of a digital currency. This is not to be confused with the many different types of digital payment options we have today. While consumers increasingly use payment options such as P2P and mobile payments to move money through digital channels, these solutions are all based on the traditional dollar and the existing banking system and payment card rails.
A true digital dollar would be much like a cryptocurrency, but issued by the Federal Reserve and backed by the U.S. government. It would enable immediate access to relief funds through free bank accounts connected directly to the Federal Reserve – something especially important to the unbanked and underbanked. A proposal for a new digital currency was included in early versions of the CARES Act, but it was not in the final bill.
The massive fraud spurred by the COVID-19 pandemic and the subsequent freezing of funds for legitimate people truly in need tells us that the need for a digital currency is more urgent than ever. But to make this happen, lawmakers, regulators and leaders in the financial industry must create new standards designed to support the secure use of digital cash and the unique challenges that come with it. These standards should include:
A framework for guaranteed, instant settlements: Our traditional financial system is built in silos and settlement times were necessary as people move money from one silo to another. With a digital dollar, transfers are instantaneous and immediate settlement should be guaranteed for both the consumer and the merchant.
Effective dispute and fraud resolution: In our current financial ecosystem, chargebacks allow banks to reverse fraudulent transactions and return funds to their rightful owner. Instantaneous money exchanges would make it more difficult to identify, dispute and reverse fraudulent transactions. More modern technologies and policies would be needed to detect fraud and preemptively stop unauthorized transactions.
Stronger data security and identity verification: Currently, there is no federal law surrounding the protection of consumer data in the U.S., nor any national framework for verifying identities in digital channels. Stronger data security, identity verification and user authentication at the national level would be needed to keep consumer funds safe and fight systemic fraud as the financial sector becomes increasingly digital.
A fully digital financial future promises greater financial inclusion, making it easier for people to access their money, reducing fees and settlement times, and enabling a wider variety of ways for people to send money and make payments. However, we will only be able to achieve this if we come together and develop new standards designed to secure the digital cash ecosystem.
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