Digital currency will soon be all the rage. Won’t that just worsen inflation?
Dear digital skeptic,
There are a lot of new developments regarding digital currencies. It is inevitable that they will be introduced by central banks and become a normative part of our lives. It is also a development that has many more downsides than mere concerns about inflation.
To be clear, a digital currency is a form of currency that is only available in digital or electronic form and not in physical form. Some call it digital currency, electronic money, electronic money, or e-money. Some see cryptocurrency as a subset of digital currency. That’s a moot point – more on that below.
Overview of digital currencies
China is seeking to be the first major economy to introduce a centralized digital currency. It is ramping up its central bank digital currency (CBDC) trials with the goal of issuing a digital renminbi (their primary physical currency). The country currently accounts for 44% of global digital payments. The digital renminbi would expand oversight by allowing the government to monitor all transactions.
In April, the UK announced the creation of a task force to explore a CBDC. The Federal Reserve has also been researching central bank digital currencies for some time. The Federal Reserve Bank of Boston is working with MIT on a digital currency.
The United States wants to develop “rails” to move money faster for unemployment benefits and stimulus checks. Treasury Secretary Janet Yellen said new rails would be cheaper and safer. A CBDC would allow central banks to maintain competition and exploit innovations as well as cash and other forms of payment, while monitoring every transaction. Beyond concerns about runaway inflation, it also raises privacy concerns.
Categories of digital currencies:
- Decentralized cryptocurrency (many experts see it as a digital asset more than a digital currency).
- Bitcoin, Ethereum, Dogecoin, etc.
- Peer-to-peer network, no central clearing authority, distributed ledger technology (like blockchain) confirms valid tokens and journal transactions, can be volatile.
- Distributed ledger technology, less volatility as tokens are pegged to the dollar, a basket of currencies or a commodity like gold
- Example: Diem (Facebook’s Libra)
- Central Bank Digital Currency (CBDC).
- Tokens that represent the fiat currency of a nation, the government takes responsibility
- The ledger (or rails) may differ from a commercial institution
In mid-July, Jerome Powell, Chairman of the Federal Reserve, appeared before the House Committee on Financial Services, noting that stablecoins tied to a traditional currency, like the dollar, need regulation to protect users. He was, however, undecided as to whether the benefits would outweigh the costs. “Those [stablecoins] are economic activities very similar to bank deposits and money market funds and they should be regulated in a comparable manner.
Notably, a government-controlled digital currency would render many stablecoins and cryptocurrencies obsolete. The Fed plans to release a report on a US digital currency in September. My view is that governments will be forced to attempt to regulate all forms of digital currencies in the future to maintain their desire to exercise global monetary policy.
The pros and cons:
Justin Honse has written an insightful article listing the reasons CBDCs will be viewed positively and why you and I should be concerned. The lists below are directly from his article, The ugly side of the CBDC.
- A new monetary policy tool for the Fed.
- Greater financial inclusion (to see Banking for All Act).
- No account maintenance fees.
- Faster receipt of direct economic stimulus payments.
- Minimal to no fees for money transfers and payments, maybe even across borders / Int’l.
- Real-time (or near-real) money transfers and payments.
- Possibility of being paid interest on our deposit balances in the CBDC.
- Primarily digital access through a phone app or website.
- Potentially additional locations where the Fed account is accessible, such as US post offices.
- Streamlining of potential future UBI payments.
- Heavily monitored / tracked transactions.
- Loss of anonymity of species.
- Savings restrictions / limits.
- Restrictions / limits on what can and cannot be spent.
- Negative interest rates.
- Effects of real-time inflation on monetary policy.
- Automatic tax collection.
- Automatic collection of government fines, tickets, child support, student loans, etc.
- Commercial bank disintermediation (ie banks could disappear).
- Currency expiration dates (that is, it must be spent within a certain period).
- Possible elimination of physical species.
- The possibility of being cut off from the system without resorting to money.
In my last book, Seven Gray Swans: Trends Threatening Our Financial FutureI wrote about the risks of a cashless society and the âuseful commoditiesâ created by technology that are in fact potential losses to our economic, religious and social freedoms. In my opinion, the development and adoption of CBDCs needs to be watched carefully as a gray swan event – an obvious danger that we tend to ignore.
Chuck Bentley is CEO of Crown Financial Ministries, a global Christian ministry, founded by the late Larry Burkett. He is the host of a daily radio show, My MoneyLife, which airs on over 1,000 Christian music and discussion stations in the United States, and author of his most recent book, Seven Gray Swans: Trends that Threaten Our Financial Future. Make sure to follow Crown on Facebook.