Everything You Need To Know About Central Bank Digital Currencies

The inevitable introduction of Central Bank Digital Currencies (CBDCs) could be the most historical and fundamental change to the global financial system since Bretton Woods. In almost any iteration, CBDCs could completely revamp the global financial system as we know it. They have the potential to change the face of finance, and ultimately, change the nature of money itself. Through CBDC’s, fiat money will become truly digitalised and finalise the merger between monetary and fiscal policy.

The development and implementation of digital government money is not necessarily a trend or development one might trade, but rather represents what could be the biggest change to how the financial system is constructed and operates, and is a development everyone must be aware of and would do well to educate themselves on. Should Central Bank Digital Currencies be developed and introduced in a certain permutation, then what money and currency actually are will be reinvented. Everything from how credit is created, the role of central banks and governments in society, monetary and fiscal policy transmission mechanisms, how the banking system operates, how transactions are processed, the very nature of money itself and how it works, all these things have the potential to be redefined and reengineered entirely.

The problem is however, with these significant changes come even more significant implications. Brought on by temptation, necessity, wealth inequality and rise of populism, Central Bank Digital Currencies “might open a Pandora’s box of unintended consequences, fiscal as well as monetary, overwhelming our would-be masters of money.”

What are Central Bank Digital Currencies?

In their most powerful iteration, Central Bank Digital Currencies will allow individuals, businesses and almost everyone in the private sector to have a digital wallet or bank account directly with their central bank. This in itself is significant, as within our existing financial system it is only commercial banks who are able to account directly with central banks in the form of central bank reserves. In the United States, it is though this channel the Federal Reserve conducts its quantitative easing (QE); they purchase assets from the commercial banks in exchange for central bank reserves. Without going too much into the dynamic of how QE works, it is via the commercial banking system where true money creation occurs for the real economy. Allowing individuals to have a direct CBDC account with the Fed would allow the central bank to stimulate and interact directly with the individuals, something that cannot be achieved in the present system.

This direct interaction with individuals is being purported as one of the main reasons behind the development of CBDCs. The bypassing of the commercial banking system offers policy makers a completely new toolkit in how they are able to conduct monetary policy. No longer will central bankers’ stimulative measures be constrained by the wills of commercial banks and private sector credit creation. Rather than relying on bank profitability, regulation and demand for credit to influence the money supply in the real economy, the Fed would be able to inject liquidity directly to individual consumers and businesses themselves. Such a form of a Central Bank Digital Currency would truly transition the central banks from the lenders of last resort to the spenders of last (or first) resort. With such a potentially powerful tool comes great responsibility and equally great consequences, as I will endeavor to detail below.