Over the past few years, advocates in the United States and around the world have been loudly calling for a new form of money and currency and the elimination of what we today call “cash.” By 2024, trustees should expect questions to arise regarding central bank digital currencies (CBDCs) in general, and in particular a digital dollar issued by the Federal Reserve. Although conceptually related to cryptocurrencies, the two are different in nature and results. Here, we share some of what we are observing, researching and preparing for regarding CBDC.
What is CBDC?
Let’s start by defining our terms broadly. Fundamentally, money is defined by its uses and how widely it is accepted as a method of payment. Currency is the tangible (or now intangible) form of money. The modern term for this form of currency is “token-based,” a bearer instrument that is self-verifiable no matter who holds it. So far, so good. But now, with the infusion of the word “central bank” next to digital and currency, there’s another set of terms we need to understand in the right context:
central bank currency Includes cash, but primarily in digital form as reserves held by the Fed. Banks use these reserves to clear and settle their obligations to each other, and the Fed uses them to conduct monetary policy.
Commercial bank funds (sometimes called private funds) It is also digital in form and exists as a deposit in an insured depository institution – a bank. Debit card transactions, Zelle or Venmo payments, and electronic payroll deposits are all examples of commercial bank funds transfers.
CBDC It is a digital payment instrument denominated in a unified national account and is the direct responsibility of the central bank that issued the unit.
digital currency Includes commercial bank currency, central bank currency and any future CBDC. It is not a “cryptocurrency”, at least from the perspective of banks and treasuries.
Stablecoin is a cryptocurrency whose only value is pegged to another asset, such as the U.S. dollar.
Next, for the sake of our discussion, a central bank has a monopoly on issuing currency in the country in which it operates. There are only 3 countries in the world that don’t have it – although the numbers vary, out of all the countries in the world (approximately 200+/-), there are over 100 countries”Explore” CBDC.
CBDC and cryptocurrencies
CBDC is fundamentally different from cryptocurrencies. Central banks issue CBDC, and private companies offer cryptocurrencies. CBDC aims to be the only allowed form of currency, Cryptocurrencies, on the other hand, add to existing forms of money. From a U.S. domestic economic perspective alone, CBDCs present significant implementation barriers and would have systemic consequences if they became the sole currency in the United States.
We have examples of one country that has adopted a CBDC (Nigeria) and another that has adopted cryptocurrencies (El Salvador). Both countries experienced shortcomings that experts feared, but also few positives promoted by promoters. To be sure, both countries’ economies and currencies have been chronically unstable. The lack of usage by citizens across countries proves that people (at least in Nigeria and El Salvador) seem to prefer the existence and choice of physical currencies.
Geopolitics and global reserve currencies
CBDCs have a lot to do with regime change and increasing payment options that don’t include the U.S. dollar, or the Society for Worldwide Interbank Financial Telecommunication uses sanctions to force a change of agenda by restricting access to global payment systems.
Current trends show that countries are seriously exploring a world order without US dominance and achieving self-protection by getting rid of forced dependence on the US dollar. In this regard, CBDC is a very real geopolitical tool, more so than the BRICS (Brazil, Russia, India, China, South Africa, Egypt, Ethiopia, Iran and the United Arab Emirates) threat to the dollar’s global reserve hegemony More real.
The main geopolitical players in the CBDC competition are: (1) China, which has a fully functional CBDC and allows for comprehensive government surveillance; (2) the European Union, which is preparing for deep regulatory and systemic reforms of a purely digital euro; (3) the United States , currently its central bank Support stablecoins, not CBDC.
Finally, the influence of the private sector plays a fluctuating but consistent role alongside or against central banks. This is certainly nothing new. What’s new, however, is that numerous industries are attacking cash—banks, fintechs, credit card companies, and more. Integration between private sector networks (e.g., radio frequency networks, fiber optics) and public infrastructure and systems has become so thoroughly intertwined that determining whether lawmakers or businesses will push forward is difficult and unpredictable.
The storm is coming
Practicality seems to explicitly prohibit the adoption of any fully independent CDBC in the United States. However, practicality does not appear to be as influential as it once was, and political regime changes appear to bring more dramatic policy shifts with each administration – even within governments. Terms such as de-dollarization, hyperinflation, BRICS+ and “global reserve loss” keep cropping up in daily discussions. Trustees must keep an eye on weather changes.
