If you’re following the drama in the crypto space, you might be feeling a little overwhelmed… is crypto done? Is it going to save the world, or is it evil? Will it be the end of money, or the beginning? Well… what’s actually going on is way more exciting than that. Cryptocurrency is part of an evolution of money, neither good nor evil, but a mere iteration of a representation of a store of value, and a catalyst for changes in the way we interact with it.
What may be more important than focusing solely on the prices of coins right now, is the underlying current of direction in this space and what it means for our monetary future… and our future may be a digital dollar, a digital dollar that’s looking more like it will happen with each passing day. And while we’ve briefly touched on what a digital dollar is in past issues, there’s more to the story. So, let’s talk about it… and look at what a Fed report published earlier this year has to say on the matter.
CBDCs To Stabilize The System
While other countries are planning, or have already implemented, their own CBDCs, America lags… and we’re aware of that fact. Decision makers also seem to be aware of the fact that, in order to stay top dog financially, we need to get ourselves in gear. The rapid adoption of digital forms of payment shows no signs of slowing, and cash payments are declining rapidly, making up only about 20% of transactions made today according to the Atlantic Council. That’s an 11% decrease in just the last five years. Clearly, the future is digital, so what do we plan to do about it?
According to some in positions of power and influence, a U.S. CBDC is possibly one of our best bets for stabilizing the monetary system as it passes through current changes. U.S. Fed Reserve Vice Chair Lael Brainard has stated outright that America “must” consider how to preserve ready public access to save central bank money, and that a digital dollar and the adoption of CBDCs and crypto should all exist together as a solution. And not in passing or casually, these statements, and statements like them, were made by Brainard before the Committee on Financial Services in May.
In this same set of statements, Brainard alluded to the possible negative ramifications of the U.S. not implementing a CBDC, stating that European central banks issuing CBDCs may threaten the position of the dollar as the global reserve currency. So, a CBDC may be important to us when it comes to ensuring the strength of the U.S. dollar… sounds like we know what needs to be done, we’re just dragging our feet about doing it.
What The Fed Said
But if we want to get real formal with it… we can just take it all from the horse’s mouth. In January of this year, the Federal Reserve put out a paper on a digital dollar titled Money and Payments: The U.S. Dollar in the Age of Digital Transformation. Sounds delicious… wonder what tidbits of information can be found in this little 40-page report. Don’t worry, we read it, so you don’t have to.
The paper starts out by defining a CBDC as a digital liability of a central bank that is widely available to the public and, as such, is analogous to a digital form of paper money. It also lays out a background, wherein it’s noted that that Fed policymakers have been studying a CBDC closely for several years and that reserve staff will “continue to play an active role in developing international standards for CBDCs.”
It’s important to note here that, should a CBDC be implemented, holdings and transactions will be managed by private sector accounts instead of Fed direct customer accounts. That’s because, straight away, the report dives into some cases for a CBDC and explains that Americans have had digital money for years, but the difference here would be that “a CBDC would be a liability of the Federal Reserve, not of a commercial bank”.
The report lays out the different forms of money as a means of payment, store of value, and unit of account and goes over some of the different structures in place in the monetary system and discusses the challenges presented due to the fast evolution of current payment systems. What’s interesting in this section is that the Fed has been building a new interbank settlement service for instant payments… and it’s almost done, called the FedNow Service, which will debut next year.
The FedNow Service will allow commercial banks to provide payment services to households and businesses around the clock, every day, without interruption. The report highlights must-haves if a functioning, useful CBDC is to come to fruition… it must be privacy-protected, intermediated, widely transferable, and identity-verified. Finally, the paper states that the Fed is considering how a CBDC would fit into the monetary landscape, and that a CBDC would probably be greenlit as long as research points to a CBDC proving superior to other methods that might solve a core set of current monetary problems facing America.
And there it is… could the implementation of a CBDC be the magic slipper that transforms our somewhat laggy, aging monetary system, or is it a fever dream? To read this report, it almost seems like we’re between a rock and a hard place… do we do this, go for a CBDC and all that could potentially go wrong with it, or do we stay in an antiquated monetary system and virtually ensure our own demise, just to avoid risk?
While it does make you wonder, we think the potentials of blockchain technology for monetary change, should we execute properly, are almost unfathomable. We hope you keep coming back, we have a feeling something big is coming in this space and we want to be the ones bringing it to you as it happens… so be sure to check out next week’s issue. As far as we can tell, it’s not about specific coins, it’s about the mission of the technology.