New name… old business model. That sums up the push for government run digital currencies.
For a reality check, we already have them. When was the last time you sent physical U.S. dollars to pay for a big purchase? Or do you pay your taxes by sending in an envelope stacked with cash?
That’s a big NO from me and this year has only pushed digital transactions to new heights. For smaller purchases, I’ve gone completely hands-free with Apple Pay. I’ve stopped carrying cash altogether.
To further back this first point, there are about $2 trillion worth of Federal Reserve notes in circulation. That’s a big number, but it’s a small piece of the total money pie.
The official M2 money supply is close to $19 trillion, almost 10 times the number of dollars in circulation. This number includes cash, savings accounts, checking accounts and positions in money market funds. And there’s still a lot more to factor in when considering further effects of fractional reserve banking and other financial tricks.
So, the number of dollars in circulation is small in comparison. I hope it’s now clear that we already have digital government currencies. The rise in technology has made this possible, along with Nixon removing the dollar’s convertibility to gold in the 1970s.
New Central Bank Digital Currencies come with an Old Playbook
So, what’s all the hype around central bank digital currencies (CBDCs)? We have Bitcoin and other cryptocurrencies to thank for that. Governments around the world let them get a foot in the door and they’ve become too big to squash.
While I worked in China with a cryptocurrency company, it was illegal. To get around that, they called it a “rewards token.” Governments have been flipflopping on their digital currency rules and regulations. But now, they’re trying to embrace the trend. They’re trying to incorporate them to keep control.
China has already started testing its own digital currency called Digital Currency Electronic Payment (DC/EP)… zero points for an original name.
A few other central banks are already testing them as well, such as Sweden. And the ECB and others have announced that they’re researching them as well.
The big positive from this trend is that central banks might develop slightly more efficient currencies. That’s possibly thanks to using some of the blockchain technologies. Although, even if they do incorporate some of that, they won’t give up control.
Central banks will continue to pull the strings on money supply and how it flows. One of the big draws to Bitcoin is that it has a limited amount available. But don’t expect the same for central bank digital currencies.
Now, I’m a big fan of less government regulation in most cases (aka having more freedom). But when it comes to monetary policy, banks need to have more control to stay competitive on a global landscape. On an individual level that’s hard to see, but when it comes to global trade and investing, it’s much more important.
Overall, central bank digital currencies aren’t what many purport them to be. We already use digital government currencies. Even if some of the tech is upgraded behind the scenes, not much will really change.
This is a trend I’ll continue to watch and I hope you stick around. Also, feel free to share this article or drop a comment down below.