For the past several years, advocates in the United States and around the world have argued loudly for a new form of money and currency – and an elimination of what we now call “cash.” In 2024, believers should expect questions about central bank digital currencies (CBDCs) in general, and a digital U.S. dollar issued by the Federal Reserve Bank, in particular. While related in concept to cryptocurrencies, the two differ in substance and consequence. Here, we share some of what we're watching, studying, and preparing regarding CBDCs.

What is a CBDC?

Let's start by defining our terms broadly. At its root, money is defined by the purposes it serves and how widely it is accepted as a form of payment. Currency is the tangible (or now intangible) form of money. A modern term for this form of currency is “token-based”, that is, a bearer instrument that is self-validating, regardless of who owns it. So far, so good. But now, with the introduction of the term central bank alongside digital and currency, we have to understand another set of terms in the right context:

Central bank money it includes money, but mostly takes digital form as reserves held at Federal Reserve banks. Banks use these reserves to clear and settle obligations between each other, and the Federal Reserve uses them to implement monetary policy.

Commercial bank money (sometimes called private money) it is also in digital form and comes as deposits in insured depository institutions-banks. Debit card transactions, Zelle or Venmo payments, and electronic payroll deposits are examples of commercial bank money transfers.

CBDC is a digital payment instrument, denominated in the national unit of account, which is a direct obligation of the central bank issuing that unit.

Digital money includes commercial bank money, central bank money and any future CBDCs. What it is not, at least from the perspective of the bank and the Treasury, is a “crypto-currency”.

Stable currencies are a form of cryptocurrency whose sole value is tied to another asset, for example, the US dollar.

Next, for our discussion, a central bank has a monopoly of currency issuance in the country where it operates. Only three countries in the world do not have them – and while the numbers vary, of all the countries in the world (roughly 200+/-), well over 100 are “exploring” a CBDC.

CBDC vs Cryptocurrency

CBDCs are fundamentally different from cryptocurrencies. A central bank issues CBDC and private enterprises offer cryptocurrencies. CBDCs are intended to be the only form of currency allowed, while crypto-currencies are added to the forms of existing currencies. Looking at both only within the domestic economy of the United States, CBDCs have massive implementation hurdles and systemic existential ramifications if they become the sole currency of the earth.

We have an example of a country adopting CBDC (Nigeria) and another adopting cryptocurrency (El Salvador). Both countries experienced the downsides that pundits feared and few, if any, of the positives marketed by promoters. Of course, both of these countries had long periods of economic and monetary instability. The lack of use by citizens of each country proved that people (at least in Nigeria and El Salvador) seem to prefer the existence and option of tangible currency.

Geopolitics and global reserve currencies

CBDCs have much to do with regime change and increasing payment options that do not involve the use of dollar sanctions or the Society for Interbank Financial Telecommunications worldwide to enforce agendas by restricting access to the global payment system, change obligated.

The current trend suggests that countries are seriously exploring a world order without the United States at the head of the table and securing themselves by moving away from a forced reliance on the dollar. In this regard, CBDCs are a very real geopolitical tool, much more real than BRICS+ (Brazil, Russia, India, China, South Africa, Egypt, Ethiopia, Iran and the United Arab Emirates) as a threat to reserve hegemony global dollar.

The main geopolitical players in the CBDC contest are: (1) China, which has its own fully functional CBDC and allows for full government monitoring; (2) the European Union, preparing deep regulatory and systemic reviews for a digital-only Euro; and (3) the United States, whose central bank currently favors stablecoins, not CBDCs.

Finally, the influence of the private sector plays a fluctuating but continuous role alongside or in opposition to central banks. This is certainly not new. What is new, however, is the number of industries attacking cash — banks, fintech companies, credit card companies, etc. The integration between private sector networks (for example, RF networks, fiber optics) and publicly owned infrastructure and systems is so deeply intertwined that determining whether lawmakers or businesses will drive developments is both difficult and unpredictable.

A storm is coming

Practicalities seem to clearly preclude any adoption of a fully independent CDBC in the United States. However, the practice does not seem to have as much impact as in the past, and political regime change seems to bring about more violent policy changes with each administration – even within administrations. Terms like de-dollarization, hyperinflation, BRICS+ and 'loss of the global reserve' are being thrown around in everyday discussions with everyday people. Believers should monitor the weather on the horizon.