There is a lot of talk concerning central bank digital currencies (CBDC). Most countries are looking into them with plans for rolling them out.
A country that is resisting is the United States. One of the first batch of executive orders that President Trump signed was to ban the establishment of a CBDC. The challenge with this is that it only applies to agencies under the executive branch. A major entity outside this is the Federal Reserve.
That said, Chairman Powell is on record as saying there will be no CBDC while under his tenure. To me, it really does not matter what the Fed says since my read is Congress has to change the law before a new form of legal tender is possible. The only central bank money that serves this role is banknotes. Reserves, what most view as "printing press go brrr" are not legal tender, hence they are not dollars.
What is ironic is this is nothing but theater. As far as a CBDC is concerned, we can see it emerging, albeit not in a way that most expect.
We should start with what is the goal of a CBDC?
There are a lot of reasons offered, benefits cited. However, I think it boils down to control. A CBDC is a digital capability that provides power to those who control it.
This is nothing new. Few seem to ask who truly controls the money supply these days. The standard tends to be the central bank which is untrue. In most countries, where fractional reserve banking is utilized, it is the commercial banks that are in control. They are not only reigning over the money supply, which they expand via loans, but also the money.
What happens when the banks closes down one's account? Access to the money disappears. Have you ever has a situation where money was taken out from your account without authorization? What did you do? Appeal is made to the bank to return it.
Hence, they have the control.
This is the state of ledger based money. The one in control of the ledger is reigning over the money.
In my view, this is the view of politicians. CBDCs give them a pathway to, perhaps, hijacking monetary policy. The result here depends upon how things are structured.
Overall, I think CBDCs will be an epic failure. The United States is smart to take this step for a simple reason: it is not necessary.
The central banks already have CBDCs. These are called reserves. The fact that they can "print" these whenever they want shows the power these institutions already have. As stated, these are not legal tender.
What is a reserve with the Fed? It is a bank instrument that is on the balance sheets of commercial banks which is redeemable for $1 in central bank money. This means commercial banks can, if they desire, swap the reserve for a banknote, i.e. physical cash.
This is a big difference from the plan of CBDCs as the present discussion unfolds. Reserves are not for the general economy. There is no way to directly inject it via policy.
Hence, we turn our attention to USDC. Actually, as regulation unfolds, this is going to apply to any stablecoin issued within the United States.
USDC is a product from Circle. This is a company that has been licensed by the US Government. Ergo, it operates similar to a bank. Compliance of KYC and AML laws is required. Failure to do so could lead to penalties from the government, the same as any financial institution.
Each coin is back by a combination of cash and US Treasuries. Here we see another area of control. Treasuries, as evidenced by the situation with Russia and China, are controlled by the government. In other words, they can freeze these assets. Since Circle is backing 80% of its supply with T-Bills, playing nice is necessary. If not, the government can squeeze the holdings.
The United States Congress is going to take up legislation regarding stablecoins. This means they will be regulated by law, which is passed by the government.
So why does the United States need a CBDC? Everything that it seeks, i.e. control, is resident in USDC and whatever other stablecoins will be operating within the US. Failure to comply means a likely banning from centralized exchanges such as Coinbase. We already saw how Circle has the ability to freeze certain tokens.
The upcoming regulations will likely require stablecoins to be asset backed. It could be written in a way that US Treasuries have to be used. If this is the case, the US Government will have complete authority over those coins.
That is what is truly desired. The Federal Reserve, which has little influence over the money supply, will even be more restricted. No longer will it be simply commercial banks who affect it. Under this scenario, the stablecoin issuers (along with the Treasury debt) will be involved.
Of course, there is a good chance that, once regulation is established, the commercial banks issue our their own stablecoins.
The "digital dollar" is already the norm. An overwhelming percentage of all USD transactions are digital. Very little is done with cash, especially within the borders of the US.
As for the new form of digital money, we are seeing this also taken care of. USDT and USDC are the largest with more in the way.
Governments can fast track their control simply by shifting focus away from CBDC to regulating the daylights out of stablecoins.
