Why the USA Wants to Create a CBDC
A report released by the BIS (Bank for International Settlements) proves that central banks worldwide are considering how they can create their own CBDCs (Central Bank Digital Currencies). According to the report,
“A CBDC could be an important instrument for central banks to continue to provide a safe means of payment in step with wider digitalization of people’s day-to-day lives.”
In this article, we’ll look at why the Federal Reserve wants to create a CBDC, the project’s progress, and the potential long-term effects of a state-sponsored digital currency.
The Central Bank Report
The BIS report, linked to above, is very readable and does not contain the type of banking and economic jargon one might expect. Instead, the report seems to be aimed at the average person so that they can understand why central banks want to create digital currencies.
When considering what features a CBDC must have, the report indicates that any government-backed digital currency should be,
- Resilient and secure to maintain operational integrity.
- Convenient and available at very low or no cost to end-users.
- Underpinned by appropriate standards and a clear legal framework.
- Have an appropriate role for the private sector, as well as promoting competition and innovation.
While the report suggests that a country may choose to use both cash and a CBDC simultaneously, in practice, many economists believe that once a country launches a digital currency, that country will eventually get rid of cash.
When Will the USA Release its Digital Dollar?
Nobody can say for sure when the USA will release its CBDC. Even just the idea that the USA needs a CBDC is a relatively new one. As recently as November of 2019, Federal Reserve chairman Jerome Powell claimed that the Fed had no plans to create a digital dollar.
In the winter of 2020, the United States has yet to reach the stage where they announce that they’re 100% going to create a CBDC. However, it seems almost inevitable that the USA will eventually announce that they’re creating a digital dollar.
From the date of the first announcement, to the day of the digital dollar’s release, how long would it take the government to create this new currency?
For context, China claims to have been working on their digital currency for four years. Only as of 2020 have they begun testing the currency and the full rollout might not happen until 2021. What’s interesting is that China is a pro-blockchain country. President Xi has publicly praised blockchain and promised billions of dollars in investment to further the development of distributed ledger technology.
On the other hand, lawmakers in the United States still seem to associate Bitcoin with drug dealers and tax fraud. Since 2017 there has been very little beneficial regulation for the crypto industry. Indeed, it’s even reaching the point where major blockchain companies are threatening to leave the United States.
Against this backdrop, it’s really hard to imagine the United States is going to be able to quickly build an outstanding CBDC in a short amount of time.
The Downside of a Digital Dollar
Investors love to discuss how a CBDC could further increase the power of the United States government and hurt the common person. Here are some of the themes that come up again and again.
- A CBDC makes negative interest rates possible. The “problem” with negative interest rates is that people can just take cash out of the bank. However, if there is no cash and people can’t put their money anywhere else, central banks can easily take interest rates negative.
- The government can freeze accounts and prevent people from spending their money. They can already do this but with a CBDC it would be that much easier.
- Transactions could be reversed, even months after they’ve happened. In fact, it might even be possible that transactions could always be reversed, even payments that were sent years ago!
- A CBDC would allow the Federal Reserve to easily disperse UBI payments. This wouldn’t be bad, per se, except that it would likely lead to inflation.
- The Federal Reserve could block certain purchases, I.e. Bitcoin
- All purchases and transactions will be tracked. The government will know everything that everyone spends their money on
On this last point, there are those who say that perhaps a CBDC could be anonymous, like cash. According to the BIS report, that’s not going to happen…
“Full anonymity is not plausible. While anti-money laundering and combating the financing of terrorism (AML/CFT) requirements are not a core central bank objective and will not be the primary motivation to issue a CBDC, central banks are expected to design CBDCs that conform to these requirements (along with any other regulatory expectations or disclosure laws).”
The Advantages of a Digital Dollar
Although the disadvantages probably outweigh the advantages, in this world nothing is ever black and white. Here are a couple of the advantages of a digital dollar.
- Millions of Americans still don’t have a bank account. A CBDC could give them a safe place to store their money that isn’t under their mattress.
- A CBDC will be infinitely more effective in distributing stimulus/UBI payments. Money can be sent in seconds, rather than months.
- Merchants can save money. CBDC payments will be free, meaning fewer credit card processing fees. Also, if cash is removed from the system that’s also another expense that merchants don’t have to consider.
- Peer to peer payments will be easier. Even Venmo payments can take a few days to go from one bank account to another. With a CBDC you’ll be able to pay your friend in seconds.
- Cross border payments will be easier. If Mexico also has a CBDC then Mexican-Americans (just as one example) will be able to send money back to Mexico quickly and for only a minimal exchange fee.
In all likelihood there are other benefits as well that we haven’t even considered. Only time will tell what the long term effects of a CBDC actually are.
The Next Few Years
Even though the Federal Reserve hasn’t announced that they’re going to create a CBDC yet, it’s only a matter of time. A digital dollar would give the government so many powerful tools that it’s hard to imagine they would ever pass it up.
Complete control of the bank accounts of their citizens, total knowledge of what everyone is spending their money on and the ability to tweak economic factors like the interest rate: it’s a government’s dream.
This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.