Digital Currency

Digital currencies are on the rise. Why? Well technology wise they are clearly superior to the status quo, People and politicians will demand it, or at least demand to have some measure of control over it. But what is “it”?

Well “it” means different things to different people. At its core it is a more sophisticated and flexible payment and reserve system. Payment and reserves. Aren’t we talking about cash here? In some aspects yes but others no. Central banks are rapidly moving into this space. Tether, bitcoin, stablecoins, etc. Lots of players in this market all competing for market share. The outcome will be something to see.

The US dollar is clearly the desired reserve currency across the world, something I am quick to point out is both an enormous strength and weakness should that change. Note we are only ~50 years removed from the gold standard of the early 1970s and looking across history we can see monetary systems have changed.

So what can you do with a digital currency? I’ll focus on Central Bank Digital Currency (“CBDC”). I do not expect significant traction with non-government authorized or regulated currency. Sure other forms of currency will exist abroad and some domestically but regulation will stifle them. Why? Well after a certain size you want to have the government backing the security and stability of these systems. Taxes need to be paid. Know-your-customer (“KYC”) laws to be followed. As a few ideas on why we might want CBDC…

-Real time payments (not a thing today).

-Inflation protection, think saving for your first house, healthcare, or education.

-Micropayments, as the current payment rails are too cumbersome and costly for this to be viable.

-Direct cash payments to people and small businesses. This is the big one for me. Today, we lack the tools to properly implement this. The Federal Reserve stabilizes asset prices, capital markets, even the Paycheck Protection Program was done under the Fed. But why should the Fed be giving grants, technically loans that nearly all will convert to grants, to companies specially to pay people? The answer is simple, those companies are the only ones that have the “payment rails” set up. It’s a travesty.

– Progressive consumption taxes can be more effectively implemented.

Can central banks actually achieve this? Perhaps.

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