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Sexy CBDC’s For Uncle Sam

Central Bank Digital Currencies in Route to Becoming Legal Tender

What would it look like to live in a world where paper money became a thing of the past and the government forced you to make every transactions with their own digital currency? Every single bit of that information stored and analyzed on some government database. Every transaction and individuals information fully visible for public scrutiny.

Sound like a nightmare?

Well I believe its closer than we think -- It may be just right around the corner!

Countries around the globe are struggling to uphold the value of their national currencies after the devastating effects of the pandemic and many of them are beginning to look into alternative methods to maintain the economic health of their State.

The truth is that governments everywhere are scared of “third party” digital currencies. They recognize them as a threat to their financial systems, on the other hand, understand the value associated with a more efficient form of payment.

The big question then becomes: Why do governments not issue their own digital coins?

What is a CBDC?

This is where the idea of having a central bank digital currency (CBDC) comes into play. Currently around 90% of all central banks are looking into a CBDC, while 60% are actively experimenting with their own CBDC.

Majority of Central Banks Engaged in CBDC Activity Source: Charles o’Hanny

Essentially a CBDC would have all the benefits of being on the blockchain with the additional advantage of having the legal and regulatory safeguards that national currencies currently have.

Lets begin to talk about the risks and benefits associated with a transition to CBDCs.

Benefits of CBDCs

Clearly having a form of instant payment and quick settlement would make transactions a lot cheaper. Currently around 0.8% of GDP is spent on transaction related to retail consumer spending. A shift to a CBDC could help to significantly reduce that cost and would pass on those savings directly to the consumer.

A CBDC would allow everyone the ability to have a bank account (wallet) and could help to improve the lives of the unbanked. Governments could even target individual wallets to send out stimulus, unemployment, and other welfare payments.

One benefit would be that it would make it much easier for other countries to no longer rely on the US dollar. They would compete with other payment companies and the US dollar status and standard could disappear.

Since April, 2020 China has been experimenting with its own digital currency, with the help of 4 of its most influential banks. I could easily see China issuing a form of digital legal tender that may compete with the US dollar. However, they would need to work out the many pitfalls as outlined below.

Risks of CBDCs

You may ask why are there currently no widely accepted CBDCs. The answer would be, to be able to transition an entire country away from its tangible fiat into a trust based blockchain enabled currency, is a daunting task.

For a start, it would be incredibly difficult convincing an entire people that the network would be safe. Great effort would need to be put in to determine the correct consensus mechanisms that are required to establish trust and credibility of the system. Widespread education would be needed, which may prove difficult, especially for the Boomer generation.

Then there is the question of interest. Should CBDC be an interest bearing asset? How would that rate be set? Could central banks offer a negative interest rate to incentivize smaller banks to add CBDCs to their balance sheet? Opening up CBDCs to earn interest opens up a whole new beast and with it many additional problems to be solved for.

In addition there is the risk of money laundering and bad fiscal actors. What kind of information should be stored? Where will this information be stored? Who will have access? All of these are valid concerns that would need to be addressed before declaring a CBDC a form of legal tender.

What Does This Mean For Other Cryptocurrencies?

Possible Ban on Crypto Worldwide

The attitude of the US government toward cryptocurrencies can best be seen in the recent SEC vs XRP lawsuit. I go in depth about this lawsuit in last weeks article, which you can read here.

In summary the SEC is looking to deem XRP as an illegal security. This case will set a huge precedent for all other cryptocurrencies going forward. A ruling in favor of the SEC could open up the grounds for them to go after BNB, ETH2, BCH and many others.

If the United States takes this stance I can see the EU following suit. Again they view these currencies as a threat to their economic health. The EU already has plans to release its own CBDC in the next few years and they do not want Bitcoin or any others competing with it.

Indecision of the legal status of cryptocurrencies in the U.S has driven crypto related businesses oversees and may result in the greatest country in the world missing out on the next technological renaissance.

Thanks again to all my wonderful readers. I couldn’t do it without you!

  • Josef S Loffler

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