By Matthew Gaude & Shawn McGuire
The digital dollar is upon us.
In recent years, the introduction of cryptocurrencies and digital assets has sparked a conversation about introducing a Central Bank Digital Currency (CBDC) as the primary form of currency for U.S. citizens. And with every passing day, our government is closer to adopting a CBDC and transforming our monetary system.
What exactly is a CBDC? It’s essentially a digital version of the U.S. dollar, a currency that would not be printed; instead, it would only exist in cyberspace, allowing consumers to transact without a bank account. CBDC wouldn’t be backed by a physical asset, but it would still be issued and backed by the Federal Reserve.
A digital dollar could be a potentially revolutionary technology, changing the way we use, exchange, and deal with money—for better or worse. As with anything new, there are pros and cons to consider regarding the introduction of a CBDC as the primary currency in the United States. For example, it could jump-start innovations in the financial sector and support new business models.
However, as we will detail in the article, we don’t believe the potential benefits outweigh the dangers. And that’s because the digital dollar will give the Fed and government almost unbreakable financial control over your life.
Phase One
The FedNow Program
FedNow is the first government-created and backed real-time payment portal that allows banks to send and receive funds instantly. Think of it as the government version of the already established privately made systems like Venmo and Cash App.
The introduction of the FedNow Service, scheduled for July of this year, has the potential to bring about monumental impacts on the U.S. payment landscape. With a brand-new infrastructure that leverages speed, data, and communication to facilitate transactions, the new service is designed to enable consumers to make instant payments (e.g., mortgage or auto loan) within seconds. Previously, consumers would have to ensure an automatic payment was scheduled days in advance to confirm it would clear by the due date. The introduction of FedNow seeks to eliminate this delay, allowing for instant and secure transactions between individuals and businesses.
Imagine a future where you can send money to a friend or pay for a purchase and the recipient instantly receives the funds. The FedNow program aims to make this a reality. If this sounds familiar, you wouldn’t be wrong. There’s a similar system already in place today known as the real-time payments network, a private service launched in 2017.
You might even already use this type of service if you have used Zelle’s services through your own financial institution. (Zelle is the only application-based processor in this network and is a common provider of this service for many banks today.)
This instant payment system provides numerous benefits: it enhances financial inclusivity by ensuring individuals and businesses of all sizes have access to faster payments. It also reduces the risks associated with delayed payments and improves the overall efficiency of the economy. But what it won’t do is replace cash.
The Pros of Introducing a Central Bank Digital Currency
No Deposit Insurance Necessary
The introduction of a Central Bank Digital Currency would change many of the existing structures around our financial system. As seen with the recent Silicon Valley Bank collapse, many people and businesses lost money that fell outside of the FDIC limits.
A 2022 report from the Federal Reserve informs that a CBDC wouldn’t be the liability of commercial banks; instead, it would be the digital liability of the Federal Reserve. Without a physical asset to determine its value, the CBDC would have no credit risk and no liquidity risk.
With a reduced risk of losing money, the need for Federal Deposit Insurance Corporation (FDIC) could become obsolete. This could also result in a more streamlined process of managing your deposit relationships. Instead of splitting your money between different banks, you could have your money in one bank without the concern of surpassing FDIC limits.
Increased Financial Inclusion
As of 2021, there were 5.9 million households in the United States without a checking or savings account. Without those tools, it’s difficult for unbanked people to participate in the ever-growing digital economy. That’s one of the main ways that a CBDC could help improve our current financial system.
Low-income households and traditionally underrepresented communities could see improved access to banking services. Instead of depending on cash payments or costly check-cashing services, they may be able to open digital wallets to store and use digital currency. This could also provide the tools to help improve their financial standing which they might not have had access to previously.
Deterred Criminal Activity
One of the most important aspects of a CBDC is identity verification. When you withdraw money at the bank, the teller asks for your driver’s license or another form of identification to ensure you’re supposed to have access to this money. These identification rules also act as a deterrent to financial terrorism, money laundering, and illegal activities.
CBDC would use similar principles and rules to shield your money (and the country) from these types of criminal activity. Since your banking transactions would be monitored and tracked by the Federal Reserve, criminals would have a difficult time covering their tracks.
Increased Efficiency
Digital currency transactions would occur in real-time, making it more efficient than traditional banking. There would also be enhanced security and speed compared to using physical money. Instead of waiting days for a payment to appear or to receive money, you might see it instantly.
The potential for increased efficiency with a CBDC could also help people track transactions, budget, and transfer money with more ease.
The Cons of Introducing a Central Bank Digital Currency
Security Risks
A CBDC is highly dependent on digital infrastructure to even exist. As such, one of the primary concerns around implementing a digital currency is its vulnerability to cyberattacks. While CBDC is less susceptible to credit risk and liquidity, it still requires heightened security against hackers.
A digital currency would have its transactions and important data stored on secure servers. Even with high-level encryption and security, there’s still a risk that a cyberattack could lead to significant losses for businesses and individuals. At a personal level, that could require additional vigilance around protecting your passwords, using two-factor authentication, and being aware of potential scams.
Privacy Concerns
Centralizing all banking with the Federal Reserve could be a double-edged sword. Earlier we mentioned that having transparent transactions could deter criminal activity. The flip side of that could mean a loss of privacy.
If all banking transactions are tracked and monitored by the Federal Reserve to detect criminal activity, that means government entities could potentially access your personal transactions and spending habits. If a CBDC is introduced in the United States, that could mean that your banking transactions could be reviewed, approved, or prevented by the Federal Reserve, which is a privacy concern for many U.S. citizens who would prefer to keep their transactions private.
Disruption to Traditional Banking
Implementing a CBDC in the United States could disrupt a banking system that’s been in place for centuries and change the core structure of our financial system. Although this may be more of a long-term speculation, some experts believe it could lead to the eventual phasing out of physical currency. For financial planning and advising, such a disruption could make the average person reconsider which financial services they use and what they plan to invest in. The introduction of a CBDC could create rapid change for the entire banking and finance industry.
Not Just a U.S. Project
According to the Atlantic Council Central Bank Digital Currency Tracker, 114 countries are currently exploring a Central Bank Digital Currency. This represents 95% of global GDP. Approximately 65 countries are in the advanced stages of CBDC development.
Eleven countries have already launched their own CBDCs, including Nigeria, Jamaica, the Bahamas, and eight countries in the Eastern Caribbean. Twenty countries are currently trialing CBDCs, including China, Hong Kong, Sweden, Saudi Arabia, Russia, South Africa, and Singapore.
In Australia, the government is conducting pilot programs with multiple financial institutions to test CBDC use cases.
In Brazil, the Central Bank of Brazil aims to launch a CBDC in 2024. Earlier this year, Brazil successfully implemented a closed pilot program with financial institutions.
In China, the government recently introduced the digital yuan, also known as e-CNY, in its currency circulation calculations. The e-CNY represents 0.13% of cash and reserves held by the central bank. And with that, all Group of Seven (G7) economies are now in the development stage of a CBDC.
That means the world’s largest and most advanced economies—including the U.S., U.K., and Germany—are all getting serious about adopting CBDCs.
We’re Here to Answer Your Questions
The bottom line? It’s inevitable that the U.S. will adopt an all-digital form of the dollar at some point. This won’t happen overnight. But it’s a “when,” not an “if.”
Introducing a CBDC in the United States could have advantages and disadvantages. It could close the gap for underprivileged populations and foster more financial inclusion. It could reduce the risk of destabilizing events like bank collapses. However, it might also bring increased surveillance of our financial transactions, and make us vulnerable to cyberattacks.
If you have more questions, don’t hesitate to reach out. And if you want to know how you can prepare for the introduction of a Central Bank Digital Currency, call our office at 770-552-5968 or email [email protected]. Or, if you prefer, you can simply click here to schedule an appointment online.
About Matthew
Matthew Gaude is an *investment advisor representative and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. Working first as a commodity broker and then as a Business Development Manager for a national broker-dealer in previous jobs, he has the insight and experience to help clients understand the complexities of the market and implement strategies to minimize risk. To learn more about Matthew, connect with him on LinkedIn or visit www.liveoakwm.com.
About Shawn
Shawn McGuire is a financial advisor and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. He has worked in financial services since 2002 in positions ranging from financial advisor to stock broker and portfolio manager. As a CERTIFIED FINANCIAL PLANNER™ professional, he is trained to help clients with virtually all their financial needs. To learn more about Shawn, connect with him on LinkedIn or visit www.liveoakwm.com.
Securities offered through American Portfolios Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through *American Portfolio Advisors, Inc., a SEC Registered Investment Advisor. Live Oak Wealth Management, LLC is independently owned and not affiliated with APFS or APA.
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