In today’s post I want to talk about some of things that could happen when a Central Bank Digital Currency, or CBDC, roll outs. In particular, I want to focus on what could happen to the Global Dominance of the US dollar and also how this affects banks.
To begin, it’s important to understand that if and when a CBDC (Privacy Issues Around CBDC) is rolled out by the Federal Reserve, it’s very possible for the world to begin buying the CBDC and abandoning US dollars. Now this brings up all sorts of questions- like will those dollars flow back to the US, flood our country with dollars and cause hyperinflation (Why Hyperinflation could happen)? If this were to happen, there’s many implications. One has to do with dollar denominated debt; it will essentially become worthless as no one will want have dollars and everyone will want the CBDC. Now. what’s interesting about this is the Federal Reserve is in charge of the CBDC, but the US Treasury is in charge of the US dollar. So, we could see massive changes in our economic system and quickly.
Some say that there will be some sort of conversion allowed, meaning you could turn in dollars for the CBDC. While surely possible, it would force people into the digital currency.
The second thing I want to discuss is how this could cripple banking. As most of you know, banks need deposits in order to loan money and ultimately make money (Read How the Government Crushed Small Banks here). If there is a massive deposit flight into CBDCs, then the banks will have no deposits to lend against. It’s undecided right now whether the CBDC would pay interest on accounts. If they did, I imagine it would be almost nothing like checking accounts. Still, banks generate such massive profits from loans, they would have to really increase deposit rates or risk going under. The CBDC would be in direct competition and when you think about it, there sell to the American people will be that it is more efficient and that there is no credit risk, like a bank. There is no need for FDIC insurance. Many people unfortunately will sign up unaware of the different disadvantages of a CBDC, like loss of privacy. In fact, with all the fed papers I read, it’s funny how none of them mention it.
One positive thing is that A CBDC can’t be pushed out without legislative approval. Let’s hope there isn’t a push in DC for this. An economic crisis (Could Digital Banking lead to more bank runs?- read here) probably would be the catalyst needed to implement CBDCs.
