CBDC’s: An Innovation to Embrace or Nightmare Scenario?

As regular readers have probably surmised, I am a big fan of technology given the progress and efficiency it represents, especially when it comes to Cryptocurrencies. But my enthusiasm doesn’t extend to CBDC’s and today I’d like to explain why.

There is no doubt that virtually every government on the planet is looking to benefit from the efficiency and transparency afforded by launching a digital version of their currency. Therefore, Central bank digital currencies (CBDC’s) are no longer a futuristic, abstract concept. They’re already here. Nigeria is one the ‘first movers’ in the CBDC race. Let’s look at Nigeria’s experience…

Why Nigeria’s Digital Currency Failed to Launch

In October 2021, Nigeria launched a digital version of its national currency, the Naira. It’s one of the first countries to adopt a CBDC. Nigeria has a population of 200 million — making it the most populous nation in Africa. The government designed the digital version of the Naira, dubbed the eNaira, in part to help the 40 million of its citizens who are unbanked. That means about one-fifth of the country’s population doesn’t have access to a bank account. That makes saving, investing, or building credit almost impossible.

The eNaira uses blockchain technology, so Nigerians need to create a digital wallet (similar to an Ethereum wallet) to accept and store funds. They can then spend their eNaira on goods and services, for example on groceries and gas. To get citizens to actually use the eNaira, the government offered incentives like easy implementation with an existing bank account, a mobile phone app, and a 5% discount on taxis. But even with those offers, the government couldn’t persuade enough people to use it.

So the Nigerian government doubled down. And in December the Central Bank of Nigeria began restricting cash withdrawals to 100,000 naira ($128) per week for individuals and 500,000 naira ($643) for businesses. Then the Nigerian government redesigned the currency in a “move aimed at restoring the control of the Central Bank of Nigeria over currency in circulation” and to “further deepen the push to [a] cashless economy.”

So now, not only are citizens limited in how much of their own money they may withdraw from their own accounts, but their existing cash was also being phased out. By the spring of 2023, riots broke out in the streets as citizens demanded paper money be restored. Protesters attacked bank ATMs and blocked streets, and demonstrations turned violent in some cities.

As you can see, the launch of the CBDC in Nigeria has been an abject failure.

But it’s not because Nigerians don’t like digital currencies. According to the BBC, an estimated 32% of Nigerians use decentralised Cryptocurrencies like Bitcoin. So they don’t have a problem with Crypto. They just don’t want the government forcing a CBDC on them without a cash option.

Nigeria is a cautionary tale for the more than 100 countries experimenting with some form of their own CBDC. It’s also a wake-up call for Americans.

That’s because starting as early as July 2026, we could see the groundwork laid for a “digital dollar” in the United States.

The Case Against CBDC’s

A CBDC uses a ledger system to keep track of every single transaction. And it’s programmable, so the value of it could be changed at any time. This means a government could easily change the rules to fit their whims. Want to stimulate the economy? Reprogramme your CBDC so that balances expire after 30 days.

The biggest reason a CBDC is a threat to ordinary people’s financial freedom is that the government can track all transactions on the ledger. That means it can see every purchase you’ve ever made. And it could reverse your financial decisions if it doesn’t like what you’re doing.

So it’s no wonder Nigerians prefer cash and decentralised Cryptocurrencies like Bitcoin over the eNaira. Nigeria’s 32% bitcoin adoption rate is more than double the estimated 14% adoption rate in the U.S., according to Chainanalysis. So ordinary people in Nigeria understand that digital currencies do not pose this threat or problem.

A centralised blockchain (powering a CBDC) has massive potential for an invasion of privacy. No matter how angelic a government may claim to be, a CBDC creates a massive temptation.

FedNow: The Fed’s Trojan Horse?

In July 2026 the Fed is starting a new programme which some fear is the greatest threat in history to Americans’ financial freedom. FedNow is a payment system designed for instant settlement. On paper, it sounds like a technological improvement over traditional payment networks. This is because the current global financial payment system is a dinosaur. It can take days for payments to clear. And wire transfers can take up to a week… if they don’t get lost that is! FedNow allows users to settle those types of transactions in hours instead of days. Those are the clear and well-advertised benefits. But FedNow could also be viewed as a Trojan horse. This is because it implements the infrastructure for the government to issue a CBDC. In other words, a digital dollar.

A CBDC is the digital version of a country’s currency. It’s controlled by its central bank. It uses a ledger system to keep track of every single transaction. And it’s programmable, so the value of it could be changed at any time. Right now, 110 countries are working on a CBDC, including the United States. And three countries are already using a CBDC, with the biggest being the pilot programme in China.

Like any tool, a digital dollar isn’t good or bad on its own. It depends on who wields it. The worry is that a digital dollar could track every single transaction you make. And with cash eliminated, individuals in effect have zero control over their money..

If history is any guide, giving the Fed such a powerful tool when it doesn’t even use its existing ones responsibly could prove a threat to people’s financial freedom. That’s why seasoned investors are increasingly looking to diversify outside of assets that could get sucked into a CBDC. That includes allocating some wealth to decentralised cryptocurrencies like Bitcoin.

Bitcoin has some key differences from a CBDC. It’s no one else’s liability. As long as you custody your own Bitcoin, it’s free of counterparty risk. It’s a deflationary asset, so no one can indiscriminately print more into existence. And no central authority can tamper with it. Professional investors are also going old-school by seeking diversification in physical gold and silver. Over the very long term, while the dollar has lost 97% of its value on the Fed’s watch, gold has gone from $20 per ounce to $1,900. That’s a 95x gain. It’s done a solid job of protecting purchasing power (though the performance of gold in the past 20 years has left a lot to be desired relative to other financial assets like equities).

Governments Don’t Always Get It Right

The Federal Reserve Act of 1913 established the Fed as the United States central bank, the most powerful financial body in the World today. Its original mandate was to keep prices stable. By its own data, the Fed has failed miserably at that core goal.

Source: US Labor Bureau of Statistics

As you can see, $1 in 1913 is worth close to three cents today. That means over the past 110 years, Americans have seen their purchasing power decline 97%. I believe this is primarily due to Fed policy blunders over the years. As I mentioned above, we saw that in the 1930s. As Friedman wrote, keeping real interest rates high prolonged the Great Depression. It kept the cost of money high, discouraging spending and borrowing.

We saw another Fed policy blunder following the banking crisis in 2008, when Bernanke flooded the economy with what he called “helicopter money.” The government didn’t actually dump any physical cash from helicopters. Instead, the Fed bought distressed assets from banks, and banks received a deposit from the Fed. No creation of physical cash was necessary. The Fed called it “open market operations,” or OMOs. But those newly created deposits largely sat on bank balance sheets, or with the Fed as “excess reserves.” That avoided inflationary pain, as no new money was getting off of Wall Street and onto Main Street. Since the money was held as reserves while banks worked through the write-downs from the Great Recession, it stifled economic growth and recovery. Banks didn’t see any need to undertake loans, as that was riskier than earning a tiny but risk-free yield leaving excess cash with the Fed.

In contrast, consider the stimulus spending during the pandemic: a lot of money hit Main Street, over $5 trillion… of which $1.8 trillion was the equivalent of helicopter money that went directly to households. The economy is still contending with the inflation from all that money creation today. Most recently, in 2021–22, Fed Chair Jerome Powell oversaw inflation soaring to 40-year highs of nearly 10%, all while claiming inflation was “transitory.” Then in a stunning about-face, Powell implemented the fastest interest rate hike cycle in 40 years, which ultimately led to a number of banking failures.

The market fell as much as 22% during this rate-hike period. That whipsawed investors, created a challenging environment for businesses to plan for the long term, and created inflation that harms lower-income workers over asset owners. That’s a recipe for an even faster rise in economic inequality. Just consider grocery bills: in 2020, food prices rose an average of 3.9%. In 2021, they rose 6.3%. And in 2022, they soared 10.4%. Even if food prices now stop rising, they’re up over 20% from their pre-pandemic levels. This obviously hits lower income families hardest…

Despite all this, the Federal Reserve remains arguably the most respected and trusted governmental body in the World today. Maybe because they have made ‘fewer mistakes’ than many other countries or simply because they represent the richest country in the World today. But as summarised succinctly in the chart above, the brutal truth is that their track record consistently contains some spectacular policy errors. Let’s look at what turned out to be the Fed’s worst policy blunder ever…..

In 1928 the Fed started raising interest rates to curb speculation in the stock market. By 1929 rates hit 6%. Soon after, the market crashed. Many economists view the crash as the start of the Great Depression. While the Fed cut rates into the 1930s, they never went lower than 2%. At the time, deflation was running around 2–4% annually. That kept real rates in a 4–6% range. As a result, the money supply sharply dropped.

(Inflation is the increase in prices of goods and services. Deflation is the decrease in the prices of goods and services. While falling prices are good for consumers, companies respond by slowing down production, which leads to layoffs and salary reductions.)

In his 1963 classic, A Monetary History of the United States, legendary economist and Nobel Prize laureate Milton Friedman wrote that it was these high real rates that prolonged the Great Depression. According to Friedman, it was the Fed’s biggest policy error in history.

As Friedman stated succinctly in an interview in 2000, “…From ’29 to ’32 or ’33, the Federal Reserve permitted or forced the stock of money to go down by a third. For every $100 in existence in money — I’m now talking about bank deposits and currency in your pocket — for every $100 in existence in 1929, there was only $67 in 1933.”

The Fed didn’t publicly acknowledge Friedman’s assessment was correct until his 90th birthday in 2002. (He passed away in 2006.) That’s when Ben Bernanke told Friedman, “You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”

In 2002, Bernanke was a member of the Fed’s board of governors. Four years later, he became the chair of the central bank. Ironically, as Fed chair Bernanke oversaw the Great Recession — the greatest economic collapse since the 1929 crash. So much for “we won’t do it again.”

Here’s why this is important when it comes to the Fed’s new, radical plan to remake the U.S. dollar. There is a risk that it could be worse than its decision to raise rates in 1928 and let the money supply collapse in the 1930s.

Two Alternatives to CBDCs

As you can see, the Fed has made numerous policy blunders over the years. But its next radical plan could be the worst of them all. I don’t know if or when the United States will roll out a digital dollar. But FedNow brings the country a step closer to that rollout. And if Nigeria is any indication, a CBDC probably won’t go down too well in the U.S. either. Some politicians are already recognising the potential public CBDC mistrust as an ‘opportunity’: Republican presidential candidate Ron DeSantis recently argued that a CBDC rollout is a tool for government surveillance and control that it is against private affairs, and he will ban it as soon as he gets into power.

Big picture: the threat of the introduction of CBDC’s in large countries like the US only enhances the attractions of holding some of your wealth outside the traditional financial system.

As people look to move some of their wealth outside the traditional fiat system, the two obvious alternatives are an allocation to Bitcoin and to gold.

When it comes to digital investments, Bitcoin is the most obvious in my opinion. Even if you have a small allocation, its hard asset decentralised construction means it represents a meaningful hedge against the dangers of newly created centralised CBDC’s. In essence, Bitcoin is money that can’t be programmed and as such it will be increasingly prized in a world where money becomes fully programmed. Maybe this expected explosion in demand is partly why a whole swathe of large financial institutions are following the World’s largest asset manager — Blackrock — into launching Bitcoin ETFs which offer an easy to use way for ordinary people to gain exposure to BTC.

The other alternative is gold. The metal can’t just be printed or programmed into or out of existence. Its scarcity and the work needed to bring more out of the earth have made it mankind’s preferred store of value for centuries. And over time, gold has held its value. But it’s important to recognise that in an increasingly digital online world, a physical asset such as gold isn’t ideal. Plus, gold has a 4% annual inflation rate (i.e., more gold is still being found by digging deeper and long term by looking on other planets), so gold cannot match Bitcoin’s absolute maximum supply.

CBDC’s: With Every Challenge Comes Opportunity

The beauty of investing is that all great challenges bring great profit opportunities too. This seismic shift to a digital dollar is no different. I believe people will increasingly realise that preserving purchasing power is crucial in a world of money printing and government-programmed money. They will therefore seek out assets that help protect them against further debasement of their money as well as further governmental policy mistakes. There are only a few assets that have both scarcity of supply and exist outside the mainstream financial system — factors which are critical to an asset providing a hedge against money printing and the loss of control represented by CBDC’s: the two main ones are Gold and Bitcoin. Gold is a centuries old store of value but there is still more gold being found every year and it is difficult to store and to transact with in an increasingly digital world. Bitcoin is a true “hard asset” given its maximum supply and what’s more, its decentralised network means it cannot be programmed by any organisation. I believe the prospects for superior returns in these two assets are therefore very bright as more and more investors seek safe havens and to retain control over their wealth as CBDC’s are rolled out.

PTLIB is CIO OF Dragonfly Asset Management.

DISCLAIMER: This content is for EDUCATIONAL AND ENTERTAINMENT PURPOSES ONLY and nothing contained in this blog should be construed as investment advice. Any reference to an investment’s past or potential performance is not, and should not be construed as, a recommendation or as a guarantee of any specific outcome or profit.