Central Bank Digital Currency and What It Means for You

Central Bank Digital Currency and What It Means for You

In a world that has embraced the instant-access, digital life where all our information is at our fingertips, there’s very little the world can’t find out. Statistics show that nearly 46% of those surveyed had no idea how to start protecting the information they share on the internet, and another 38% didn’t know how to begin securing their data. 

Imagine handing your receipts for everything you purchase to the federal government or a third party you didn’t authorize to have your information. Everything you buy, no matter how small or insignificant, is stored on a public server that tracks your spending habits. Where, how, and payment form will now be for all eyes to see. 

Central Bank Digital Currency

With the adoption of a central bank digital currency (CBDC), this is the reality in which we could soon find ourselves. Privacy may become a deep concern with implementing a national digital currency. While most people may embrace this new digital payment format, turning everything into a digital footprint, Millenials and baby boomers may be slower to acquiesce.

Ryan Firth, a certified financial planner with Wealthtender and Mercer Street, points out how privacy could be an issue with a move toward online direct payment systems like the CBDC. “I believe there will always be demand for paper currency and coinage because of privacy. Plus, some folks don’t embrace technology and change. That said, more and more of our lives are moving to the digital realm, including payments. Consumers and merchants have options like Apple Pay, Google Pay, Venmo, Square, Stripe, etc.

Regarding CBDCs, it has their pros and cons. I think surveillance could be an issue; just look at China and its digital yuan CBDC. I do see benefits like direct payments to individuals as we had with the stimulus checks that were sent out by the U.S. Treasury in the midst of COVID. I think intermediaries like banks would see fee compression, which is good for consumers. Banks would feel threatened by the Federal Reserve if the Fed took deposits directly from consumers and cut the banks out of the middle, so I don’t see that happening.”

Banks would also likely be part of the conversation, as Mr. Firth points out. And while the Federal Reserve hasn’t made any permanent decision regarding using CBDCs, switching to a digital platform requires maneuvering where other financial institutions are concerned. 

E-Commerce and the CBDC

One question most people will ask if there is a CBDC rollout is whether or not their options for payment will change. There has undoubtedly been speculation about how a central bank digital currency will change the landscape of payment options. Will the current United States dollar still be accepted as payment, or will all transactions require a digital footprint? Will businesses be required to convert their inventory to online only or a hybrid of online and retail?  

If you’ve ever shopped using Bitcoin or Ethereum as a payment option, using a CBDC won’t likely be much different. However, if you’ve never used a digital payment option, there are some things to know about these digital currencies. Every new aspect of technology comes with its good and evil, and the CBDC is no different. 

Pros and Cons of CBDC

  • Like most digital currencies, you’ll likely be able to purchase, sell or transfer CBDCs using a credit card, smartphone, or crypto exchange. 
  • If the CBDC works like other cryptocurrencies, it may change in value overnight, swinging from high to low and back again, especially when the public first accesses it. 
  • Unlike some digital currencies, the CBDC is likely to be anywhere. 
    • This acceptance opens up a new set of products and services currently only available through digital currency channels. This new digital currency could be world-changing for emerging economies looking to embrace digital currency as a means of getting around the cost of using the U.S. dollar.

Of course, any new market can come with its share of cons, and the CBDC is no different. Here is a short list of significant issues a central bank digital currency may face. 

  • Millennials and Baby Boomers may slowly switch to a digital payment system. Suppose the Federal Reserve moves too fast in implementing CBDCs to supplant the U.S. dollar. In that case, there may be blowback from older generations not keen on a digital-only system.
  • If CBDCs are unstable in value, banks and other financial institutions may be reluctant to embrace them in place of the dollar. This instability will demand that the current money cycle stays in place, using the CBDC as an alternate payment system, not the main one.
  • Privacy is likely a significant concern among users seeking to keep their financial information out of government hands. With an all-digital system, the need to audit someone during tax season would void itself. The U.S. government would automatically access what you spend your money on, where you spend it and how much you make. That sacrifice is likely to sit ill with plenty in public opinion.

Central Bank digital currency, like other cryptocurrencies, has a long way to go before public opinion swings entirely in its favor. First and foremost, the Federal Reserve has to decide to institute that sort of cashless payment system, which they have yet to do thus far. 

And while a new digital system may take less time to establish, getting public opinion behind an utterly cashless society may take some time to get right. Still, weighing the pros and cons of a new payment system like the CBDC is worth taking some time to think over. On both personal and business levels, it can benefit both sectors. 

The Pillars of Money

Money used to have four main pillars or four reasons for its existence. These were:

  • A tool of barter for trading. You can exchange money for goods and services
  • A way to save for future use
  • A means of accounting for measure
  • A store of value for fair payment of labor

Recently, these pillars changed to three. The Federal Reserve no longer considers money a way to save for future use. What does that mean for you? It implies that putting your money in the bank, a money market account, a 401K, or any other U.S. dollar-based product will not likely serve you well. 

Now that money isn’t considered a way to save for future uses, re-evaluating your investment portfolio may be in order. If most of the products, stocks, or bonds you’re investing in will be converted into U.S. dollars when you cash them out. One avenue that will be useful for saving for the future is physical gold and silver, but that’s an article for a different day. 

The U.S. currency landscape is changing, even if all the mainstream information available isn’t saying so. Do your due diligence and determine your next steps to ensure you aren’t left out in the cold when the landscape finally shifts. Confidently paying your bills and purchasing for your needs is paramount to your financial freedom. 

This article is published by PlayLouder! and syndicated by Wealth of Geeks