For the past several years, advocates in the United States and around the world have argued loudly for a new form of money and currency—and an elimination of what we today call “cash.” In 2024, fiduciaries should expect questions about central banking digital currencies (CBDCs) generally, and a Federal Reserve Bank-issued digital U.S. dollar, specifically. While related in concept with crypto-currencies, the two diverge in essence and consequence. Here, we share some of what we’re watching, studying and preparing for regarding CBDCs.
What’s a CBDC?
Let’s begin by broadly defining our terms. At root, money is defined by the purposes it serves and how widely it’s accepted as a form of payment. Currency is the tangible (or now intangible) form of money. A modern term for this form of currency is “token-based,” that is, a bearer instrument that’s self-authenticating regardless of who holds it. So far, so good. But now, with the infusion of the term central bank next to digital and currency, we need to understand another set of terms in the correct context:
Central bank money includes cash but mostly takes digital form as reserves held at the Federal Reserve banks. Banks use these reserves to clear and settle obligations among each other, and Federal Reserves use them to implement monetary policy.
Commercial bank money (sometimes called private money) is also digital in form and comes as deposits at insured depository institutions—banks. Debit card transactions, Zelle or Venmo payments and electronic payroll deposits are examples of transfers of commercial bank money.
CBDC is a digital payment instrument, denominated in the national unity of account, that’s a direct liability of the central bank issuing that unit.
Digital money includes commercial bank money, central bank money and any future CBDC. What it isn’t, at least from a bank and Treasury perspective, is a “crypto-currency.”
Stablecoins are a form of cryptocurrency whose sole value is pegged to another asset, for example, the U.S. dollar.
Next, for our discussion, a central bank has a monopoly on issuing currency in the country where it operates. Only three countries in the world don’t have them—and while figures vary, out of all the countries in the world (approximately 200+/-), well over 100 are “exploring” a CBDC.
CBDCs versus Crypto-currency
CBDCs are fundamentally different from crypto-currency. A central bank issues CBDCs and private enterprises provide crypto-currencies. CBDCs are intended to be the sole form of currency allowed, while crypto-currencies add to the forms of existing currencies. Looking at the two solely within the United States domestic economy, CBDCs have massive implementation hurdles and existential systemic consequences should they become the sole currency of the land.
We have an example of a country adopting CBDCs (Nigeria) and another adopting crypto-currency (El Salvador). Both countries experienced the drawbacks feared by pundits and few, if any, of the positives marketed by promoters. Granted, both these countries had long-standing economic and monetary instability. The lack of use by the citizens of each country proved that people (at least in Nigeria and El Salvador) seem to prefer the existence and option of tangible currency.
Geopolitics and Global Reserve Currency
CBDCs have much to do with regime change, and increasing payment options that don’t include the dollar or Society for Worldwide Interbank Financial Telecommunication use of sanctions to enforce agendas via restricting access to the global payment system forced change.
The current trend suggests countries are seriously exploring a world order without the United States at the head of the table and self-insuring by moving away from a forced reliance on the dollar. In that regard, CBDCs are a very real geopolitical tool, much more real than BRICS+ (Brazil, Russia, India, China, South Africa, Egypt, Ethiopia, Iran and the United Arab Emirates) as a threat to the dollar’s global reserve hegemony.
The major geopolitical players in the CBDC contest are: (1) China, which has its fully functioning CBDC and allows for complete government monitoring; (2) the European Union, preparing deep regulatory and systemic overhauls for a solely digital Euro; and (3) the United States, whose central bank at present favors stable-coins, not CBDCs.
Last, the private sector’s influence plays a fluctuating, but ceaseless role alongside or in opposition to central banks. That’s certainly not new. What’s new, however, is the multitude of industries attacking cash—banks, fintech companies, credit card companies and so on. The integration between private sector networks (for example, RF networks, fiber-optics) and publicly-owned infrastructure and systems has intertwined so thoroughly that determining whether legislators or businesses will drive developments is as difficult as it is unpredictable.
A Storm Is Coming
Practicality seems to clearly prohibit any adoption of a fully-independent CDBC in the United States. However, practicality doesn’t seem to hold as much sway as in times past and political regime change seems to bring more violent policy shifts with each administration—even within administrations. Terms like de-dollarization, hyperinflation, BRICS+ and ‘loss of global reserve’ are swirling in everyday discussions with everyday folk. Fiduciaries must keep a weather eye on the horizon.