Now, Central Bank Digital Currencies (CBDCs) are no longer a topic of speculation. The looming reality is that the financial world must prepare for their implementation. Central banks and governments are taking note of the growth and impact of crypto and are exploring ways to harness their benefits while aligning with their interests.
This trend of CBDCs is taking center stage in the world of finance and everyone must be prepared for their arrival, as it looks like they are the future of money.
CBDCs offer many advantages, including increased speed, reduced costs, and greater access to the financial system. However, there are also some potential risks associated with CBDCs, including privacy concerns, inflationary issues, and the potential disintermediation of commercial banks.
On one hand, CBDCs have the potential to accelerate the adoption of crypto and bring it to the real Main Street mainstream. For example, if the Federal Reserve were to launch a digital US dollar that became widely used alongside cash/fiat/paper money and the current financial system, this would introduce millions of people to the concept of digital assets, wallets, and other crypto-related concepts. This could serve as a gateway to the larger crypto world and increase accessibility to it for a much larger audience.
In addition, CBDCs could reduce costs for consumers and taxpayers. I say “could”. Logic would have it that the financial technology and infrastructure behind a digital dollar could eliminate intermediaries, which would decrease added costs. But the execution is everything.
Also, linking identities to funds could reduce the risk of fraud. In a world where Covid relief funds and tax refunds are being pilfered through identity theft, a digital dollar could be issued quickly and directly to the intended recipient with low or no fees involved.
Moreover, CBDCs have the potential to broaden access to the financial system, particularly for those who are underbanked or have limited access to traditional banking services. A state-issued digital dollar could be managed on a smartphone and make the financial system more accessible to more people, opening up new opportunities and bringing more people into the digital economy.
However, CBDCs also have some potential ominous “downsides”.
One major concern is privacy. A central bank or government with direct digital insight into everyday purchases could potentially abuse such privilege to track purchasing habits, political contributions, religious affiliations, sexual preferences, and more.
In the wrong hands, this information could become a weapon for political purposes, creating a mosaic of individuals that could be shaped into a social score or used to target certain populations. Furthermore, a state-issued digital dollar is only a keystroke away from being frozen, reversed, or even confiscated, making privacy and maintaining freedoms crucial concerns.
Another downside to CBDCs is that they are still subject to the same issues as fiat currencies, such as inflation and decreased purchasing power. A digital US dollar is still an inflationary asset, as the Federal Reserve can still “print/mint” more money, and an increase in the money supply is only a journal entry away.
The potential benefits of a fixed-supply currency like Bitcoin are not only missing but expect them to suffer abuses with CBDCs.
Finally, disintermediating commercial banks could have unintended consequences. If CBDCs are distributed directly from the central bank to individuals, it raises questions about credit risk and the implications of a growing central bank balance sheet.
Who will fill the end client-facing role for customer service and app development? These are important questions that must be addressed before the widespread adoption of CBDCs.
In conclusion, the debate around the pros and cons of CBDCs will continue, but it is clear that the world must prepare for their inevitable arrival. The shift to CBDCs is likely driven by the belief that technology equals progress.
To avoid problems and risks, it is important to carefully consider the potential consequences and address them before they become a reality. It is the financial technology industry leaders who need to take on the responsibility to educate and raise awareness about CBDCs and their potential impact on the future of money.
About the Author Tony Saliba
Tony is an internationally renowned business leader, multi-faceted serial entrepreneur, options trading pioneer, master trader and board member of the Chicago Stock Exchange, author, and shareholder, operator, and investor in nearly 100 companies. Tony has been the founding member of key companies in the trading and tech industries such as Efficient Capital Management, International Trading Institute, Liquid Point, Fortify Technologies, and more. He currently maintains a global team of staffers in offices around the US, UK, India, and China helping companies achieve high rates of growth and identifying initiatives to unlock exponential value.