Central Bank Digital Currency or CBDC. Have you seen this acronym “CBDC;” what is it? Think of Apple pay on an iPhone that is a “digital wallet” linking credit cards and bank accounts issued by a bank and cleared through Visa, MasterCard, American Express, or Discover. Those credit card transactions completed with the Apple pay app earn the bank and Visa/MasterCard etc., a fee of around 3%. Additionally, the purchaser may also earn you points or cash back. The purchaser may also pay an annual fee to the credit card.
Well, pull out the bank, Visa/MasterCard, etc., and substitute the Federal Reserve. Or the Central Bank in China, or the Bahamas. More than 60 Central Banks are currently exploring or moving to beta programs in CBDC. How about that! So, in a sense, this will remove the middle person or institution from the transaction as well as removing any paper or metal coins from circulation.
It also allows quick transactions for government payments such as social security, or the Rescue deposits issued recently, as well as tax refunds. 7.1M Americans do not have bank accounts and only very expensive alternatives to access the banking system. China is furthest along in beta testing CBDC. China has outlawed cryptocurrency and although some of the main features of crypto are not duplicated in CBDC, CBDC has some advantages. Currently crypto is mostly an investment vehicle with a very low rate of transaction costs either commercial or retail.
There are concurrent attempts by PayPal, Square, and even Visa and MasterCard to provide transaction services for crypto. CBDC would be designed to be used in transactions, lowering the cost for transactions significantly. Potentially it would leave out the banks as well as the payment transaction companies.
China has many reasons to move forward with CBDC. They have a centrally controlled economy as well as reasons to exercise the control of autocracy over not only citizens’ political behavior but their spending as well. Imagine having all transactions funneled through the central government. You can understand the challenge in democracies to implement something like this. Would their citizens agree to the government monitoring their spending?
Unlike crypto, with no tangible value, CBDC would be tied to a currency issued by a central bank. Crypto has a limited supply and is held against the debasement of a currency that has held for a long period of time.
There are certainly significant hurdles to the use of CBDC. Projections are 4 years or more for major economic powers other than China, to figure out how to use CBDC and those transactions will focus on the commercial sphere, not retail. Banks are aware and need to think forward about how they can compete with this serious disruption.
Earnings Season Upon Us
Earnings season has begun generally with positive news for banks. Although Netflix reported a drop in new subscribers today as the economy emerges from Covid-19. Also, corporations are entering the political arena generally supporting voting rights. Lastly, Congress introduced a resolution to study US support payment systems such as Medicare and Social Security. These issues are on the radar and we will pay attention.
Big headlines this week as Derek Chauvin was found guilty on three counts by the jury. It’s been a year since the passing of George Floyd. Still more to be done.
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