What is a CBDC? Per The Fed, “A Central Bank Digital Currency (CBDC) is a digital form of central bank money that is widely available to the general public.” Central bank money essentially refers to government debt, a liability to a country’s central bank.

Why are we talking about CBDCs? Central Banks across the globe are studying, piloting, and distributing these digital currencies for the citizens to use as an upgrade to the current financial system. The current system is a mix of physical cash and assets like gold with highly centralized “digital representations” of money on Central Bank ledgers. The fear with CBDCs is the amount of control we could be giving up to those who are in power to determine how we make, save, spend, and invest our money. This is a very real concern and should not be thrown to the wayside, if we do nothing there is an incentive for certain groups to try and control the new system of digital money.

How do we prevent a CBDC in the US? First off public education is of the upmost importance. People of all ages should understand more about the current financial system and how we got here. For instance, most people don’t know how the US dollar doesn’t operate under the hood the same way it did 100 years ago. Second, is competition from companies in America. The more competition to build a genuinely stable and robust digital dollar, the better chance American’s have at getting the best product in 5-10 years. Third is smart legislation that not only promotes competition and creation of digital dollars but also creates frameworks and think tanks for those who are trying to do so in a “safe” yet experimental way.

Where do we deploy these digital dollars? On the most decentralized and secure blockchain networks. Notice how I said network(s)! Americans should have a choice of which blockchain ledgers represent the claim to their digital dollars.

When should we see these digital dollars proliferate? In my opinion it is already happening and crypto has been a unique testing ground. With different types of “stablecoins” like fully backed versions such as Circle’s USDC or Tether’s USDT and over-collateralized versions like MakerDAO’s DAI, blockchain networks have given millions of Americans and millions more people around the globe the opportunity to test and use digital dollars in various different ways.

What should American’s think about when assessing a “digital dollar”/stablecoin?

-Who is the issuer of the stablecoin and what do their reserves look like?

-Whether the issuer has unilateral control to freeze a wallet’s balance? What kind of process is required to freeze a wallet balance?

-Where are the instruments (cash, USTs) for digital dollars issued onchain located? Banks, trusts, something else?

-Are there fees associated with using a given stablecoin?

-How much do issuers make by creating and issuing stablecoins? Are they trading against their onchain holders somehow?

At the end of the day, our government keeps spending more and more money it doesn’t have and it doesn’t look like that is going to change anytime soon. While other countries such as China, who used to be the biggest buyers of US debt, go elsewhere, the US needs to find new net buyers of government debt. This seems to be stablecoin issuers. At the moment they already hold $100B of government debt which is not much to our current $34T of debt but it is a start.

References:

https://www.federalreserve.gov/faqs/what-is-a-central-bank-digital-currency.htm