CBDC Watch: The 3 Biggest Pros & Cons of a Potential U.S. Digital Dollar (2024)

The digital currency issued by the United States Central Bank, CBDC, is designed to replicate the physical U.S. dollar, overseen by the Federal Reserve. Distinguishing itself from cryptocurrencies, it will be fully supported by the Federal Reserve and acknowledged as a legitimate legal tender. That endeavor aims to introduce an additional form of central bank-endorsed currency alongside traditional physical cash and digital bank balances.

While the U.S. still needs to set the wheels in motion for CBDCs, there is a growing need to understand its nature, benefits, the possible ways it could backfire and its current progress.

The U.S. CBDC

The concept of money has had a long road; it evolved from seashells to the gold standard and flat currency, now the primary medium of exchange globally. The release of CBDCs, together with traditional currencies, holds the potential to make cross-border transactions and the international monetary system better.

The White House dropped the curtains on its framework for regulating digital assets, including talk about a digital dollar in 2022. The Federal Reserve highlighted the importance of safety, accessibility, privacy, intermediation, transferability and robust identity verification procedures for a CBDC. Still, it cautioned against inherent red flags, including theft and fraud.

That means taking up a shield for people’s right to privacy, making it easy to handle using digital wallets, making it widely accessible and stopping illegal activity. With CBDCs, the Fed hopes to improve financial options for individuals, businesses and families.

A digital currency must pass a strict assessment, connect smoothly with current systems, emphasize privacy, gain stakeholder nods of approval and show the advantages far outweigh the drawbacks. All of that has to happen before a digital currency could hit the shelves in the U.S.

Digital Dollar Is Less Likely to Happen in the U.S.

President Joe Biden’s orders aside, an Atlantic Council board member, Lisa Pollina, talked about the difficulties in putting the president’s order into practice in an interview with Tearsheet.com. Think-tank The Atlantic Council likened U.S. cryptocurrency interests to China’s dominance. Legal problems and the power of global currencies contribute to hesitancy. To top it off, issues like data privacy and cyber threats call for solutions.

Pollina even lays out the advantages of a digital dollar, such as unbanked access, fraud resistance and quicker payments. There are many ongoing privacy and security risks, cyber threats and surveillance. The U.S. dollar may have to get up from its seat as the world’s reserve currency as CBDCs step in. A challenge comes from China’s digital yuan, which aims to promote its worldwide influence and get around international payment systems.

According to a Bank of America (NYSE:BAC) analysis, a digital dollar isn’t coming for a while, even if CBDCs are possible in the future. Here’s a fun thing to know: 98% of the world’s GDP and 67% of nations are dipping their toes in CBDCs, with 33% already reaching an advanced stage. The Federal Reserve is on the fence about it and only undertakes trial programs with loose commitments, waiting for some backing.

The authors believed CBDCs could improve financial inclusion. They also ring alarms for potential risks like competition with bank deposits and losing monetary control. They are on the edge of their seats for central banks and governments, driving CBDC innovation with the private sector lending a hand. The Swiss National Bank announced a wholesale CBDC pilot with the SIX Digital Exchange and six commercial banks.

Pros and Cons of U.S. Digital Dollar

Digital currency is in the limelight, especially CBDCs, because of a significant trend — cashless transactions and cryptocurrency usage. Financial authorities finally had a fire lit under them and thoroughly assessed the pros and cons of CBDCs.

The pros

Digital currencies have no doubt changed the way people transact. Faster, immediate transfers, international trade boost, what more could there be? Well, here’s some more advantages:

  • Unlike traditional banks, digital currencies frequently offer transactions without fees. It gives users complete ownership and a towering advantage over older systems.
  • All digital currencies are transparent, especially those using blockchain technology. Easy transaction tracking is nowhere to be seen with the opaque operations of traditional banking.
  • Since there is no chance of personal data exposure as with online transactions, digital currencies have the utmost security.
  • Digital currencies fill out the potholes in traditional banking and democratize access to financial services. It’s for anyone with an internet connection.
  • Digital currencies like Bitcoin (BTC-USD) have a fixed supply, which promises value appreciation over time, unlike traditional currencies, which are at risk of inflation.

The cons

Now, here’s the other side of the coin — the downsides of digital currencies:

  • Because digital currency is decentralized and lacks official support, volatility concerns thrive. It can be profitable, but investors, please beware of quick changes in value.
  • Despite digital currencies being anonymous, security concerns still exist because there have been plenty of hacks affecting holdings. Traditional banks give better security measures and recovery options for stolen money.
  • While users benefit from independence, using digital currencies exposes them to unregulated illegal activity because they exist outside established financial rules.
  • Law enforcement is increasingly concerned about people getting more access to digital currencies. Criminal groups could take advantage of its weaknesses for illegal activities like money laundering.
  • We already know traditional payment works. Digital currency? Not really. Its originality and dynamic character raise questions about its stability and long-term survival.

Bottom Line

CBDCs are digital representations of national currency accessible to all, including the unbanked. With 100+ countries exploring CBDC integration, the U.S. government’s recent initiative marks a notable advancement in financial technology.

On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.

CBDC Watch: The 3 Biggest Pros & Cons of a Potential U.S. Digital Dollar (2024)

FAQs

What are the pros and cons of the digital dollar? ›

Pollina even lays out the advantages of a digital dollar, such as unbanked access, fraud resistance and quicker payments. There are many ongoing privacy and security risks, cyber threats and surveillance. The U.S. dollar may have to get up from its seat as the world's reserve currency as CBDCs step in.

What are the pros and cons of CBDC? ›

Pros and cons to CBDCs
ProsCons
Allow consumers to use central bank directly.Less privacy for users.
Eliminate risk of a commercial bank collapse.Difficult to attain widespread adoption.
Easy to track.Possible competition between central and commercial banks.
1 more row

Why CBDC is a bad idea? ›

But a CBDC is always a liability of the Federal Reserve, America's central bank (that's where the CB comes from). That means the Fed has the responsibility to do with it what ever is required. In other words, whenever you use a dollar of CBDC, there's a direct connection between you and the Fed. Not a good idea.

What are the main risks of CBDC for? ›

A UK House of Lords economic affairs committee report concluded that a CBDC poses two main security risks: first, that individual accounts could be compromised through cybersecurity weaknesses; and, second, that a centralised CBDC ledger could be a target for attack from “hostile state and non-state actors”.

What happens if the US goes to digital dollar? ›

The digital dollar has the potential to become the backbone of the United States economy and change the face of global commerce. Known as a central bank digital currency (CBDC), the proposed electronic currency could make financial transactions completely digital, which would make transferring money faster and cheaper.

Will digital currency replace cash? ›

Will a U.S. CBDC replace cash or paper currency? The Federal Reserve is committed to ensuring the continued safety and availability of cash and is considering a CBDC as a means to expand safe payment options, not to reduce or replace them.

Why is CBDC better than cash? ›

A CBDC's main purpose is to provide businesses and consumers with privacy, transferability, convenience, accessibility, and financial security. Many individuals throughout the world have no access to bank accounts, so a CBDC would give them a way to be paid, hold their money, and pay bills.

How will CBDC affect us? ›

As a liability of the central bank, central bank money is the most trusted and safest form of money as it presents no credit or liquidity risk. As a potentially new form of central bank money, a U.S. CBDC could affect the international role of the dollar and the role of U.S. payment systems in cross-border payments.

Who controls digital currency? ›

A central bank digital currency (CBDC; also called digital fiat currency or digital base money) is a digital currency issued by a central bank, rather than by a commercial bank. It is also a liability of the central bank and denominated in the sovereign currency, as is the case with physical banknotes and coins.

What will happen to banks with CBDC? ›

The ABA estimates that even with a CBDC framework that caps deposit accounts at $5,000 per customer, or “end user”, would result in $720 billion in deposits leaving the banking system. That would severely impact banks as drivers of the economy.

Why does the US need a CBDC? ›

“As Americans face the prospect of an increasingly weaponized government, ensuring financial privacy is pivotal. A CBDC would open the door for the federal government to surveil and control the spending habits of all Americans.

Will CBDC control people? ›

As I've pointed out before, a fully implemented CBDC gives the government complete control over the money going into and coming out of every person's account. This level of government control is incompatible with both economic and political freedom.

How to protect yourself from the digital dollar? ›

Use strong passwords, keep your antivirus software up-to-date, and avoid clicking on suspicious links or downloading unknown software. Also, protect yourself by using two-factor authentication when you login to data-sensitive sites. CBDC is a digital currency, so you'll need to make sure your digital assets are secure.

Why will CBDCs fail? ›

There are disadvantages to a CBDC. Not everyone has access to the internet, which means a CBDC without offline capabilities might fail to be inclusive, said Reena Aggarwal, a finance professor at Georgetown University and director of the Georgetown Psaros Center for Financial Markets and Policy.

What is the truth about CBDC? ›

CBDCs are centralized digital currencies issued by a government. These digital currencies represent legal tender that operates on private blockchains. CBDCs enable digital transactions only. CBDCs offer both transparency and programmability.

What is the problem with digital currency? ›

Key Takeaways

The digitization of money through a Central Bank Digital Currency (CBDC) creates substantial threats to financial privacy, increases government power, and could be weaponized against the American people.

What are the disadvantages of electronic money? ›

The disadvantages of online payments include fraud risks, difficulty in tracing, technical issues, reliance on the internet, loss of smart cards, identity theft, and more.

Why do we need a digital dollar? ›

Digital money streamlines financial infrastructure, making it cheaper and faster to conduct monetary transactions. It can also make it easier for central banks to implement monetary policy. Examples of types of digital money are central bank digital currencies, cryptocurrency, and stablecoins.

Is digital currency better than cash? ›

Benefits of Digital Currency

Using digital currency, you can complete payments much faster than current means, like ACH or wire transfers, which can take days for financial institutions to confirm a transaction. Cheaper international transfers. International currency transactions are very expensive.

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