Central banks and governments have talked about creating digital currencies for a while now. What such a CBDC would effectively mean for the average person, has been difficult to predict. However, there are some indicators as to what would change if this digital currency effectively came to market.
The Obvious Benefits (for Banks) of a CBDC
Digital money has been around for over a decade, yet most people think that isn’t necessarily the case. Roughly half of all real-world transactions take place in digital form. Even if one pays with a credit or debit card, the associated money ledgers update digitally. The only exceptions are actual cash transactions, which have become a lot rarer in most parts of the world.
Switching to a digital currency, or a CBDC, is a logical step in evolution. It can help overcome negative interest rates, for example. Dealing with negative rates has become the new normal in most countries in recent years. Keeping funds in a savings account won’t yield any money, which is why alternative assets tend to thrive.
Last but not least, a CBDC makes it easier for banks to inject helicopter money. Currently, the printing of cash requires approval from the overarching central bank. Doing so costs money and resources. If a digital currency is created for Europe, it takes a few mouse clicks to achieve the same goal.
More helicopter money is not a good thing for the average person on the street, though. This will ultimately lead to inflation and higher prices.
Speaking of creating cash notes, it is evident that a CBDC will erode the use of physical coins and banknotes altogether. Achieving this goal on a larger scale may require switching to higher denominations first, before removing cash altogether. It is a very tough balancing act.
The Other Consequences (for Everyday Users)
As is often the case, there are other types of consequences to central bank actions. The main hurdle is how a CBDC will erode all transaction privacy users may enjoy. Cash transactions are as private as they possibly can. With a CBDC, everything is recorded in real-time, creating a digital trail of breadcrumbs.
Second, all participants will need a CBDC account. Using a digital currency without “being part of the system” will be virtually impossible. This allows banks and governments to spy on the financial behavior of citizens in a far more convenient way. Not something that will benefit the consumer, after all.
Finally, a CBDC can take over large or full extent sight of deposit issuance by banks. This is rather difficult to talk about right now. It is unclear what this will mean exactly, yet it sounds rather ominous on paper. Currently, banks are often found guilty for their involvement in money laundering. How that would be affected by a CBDC – either for better or worse – is a guessing game.
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