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What Is A Central Bank Digital Currency (CBDC) And Should We Care?

By Paul J. Carroll, CFP®April 11, 2023February 26th, 2024Videos


What is a Central Bank Digital Currency (CBDC)

A question came up recently: what is a central bank digital currency and why should we even care? Well, a central bank digital currency is in essence a digital form of the country’s fiat currency issued and regulated by a central bank, or to put it another way, it’s a digital dollar bill. Not to be confused with crypto, which is decentralized and not backed by any institution.

2 Types of Central Band Digital Currencies

There are two types of these devices. One is wholesale, one is retail. Wholesale central bank digital currencies are for interbank relationships. Really, the benefit of that will just be simplicity, reduced costs, more rapid transfers. It’s going to be part of the plumbing of the financial system. Doesn’t really affect you and me. What would affect you and me though, is the retail version that could be used for public transactions. Think of it as digital dollars in a digital wallet.

Now, any nation’s fiat currency issued in digital format is in essence a central bank digital currency. It will be issued with the same reserve requirements, the same rules, and to understand this better, we need to understand that cash, or in this case, the digital currency, is actually just a tiny percentage of the total money supply. It’s becoming more and more insignificant as more and more people don’t even carry cash, but it is not to be confused with using your debit card or credit card. That’s not a digital currency. That’s an instruction for a third party to make a transfer from one account to another account, whereas a digital currency can actually be anonymized, carried with you, and even lost.

Now you could say what we’re doing here is splitting a semantic difference. Digital cash, retail, central bank, digital currency, debit card. In a way you are, but in a way you’re not, because the digital currency is truly transportable, can be truly anonymized, though that’s going to come up. It’s going to be difficult for central banks and maybe less so central banks, but most governments to keep their dirty fingers off this currency because if it’s anonymized, it’s harder to tax. So those of you who are afraid of this kind of currency, that might help you feel better. So a central bank digital currency, we’ve decided it’s not money transfers from a debit card. It’s not crypto. It’s something in the middle, and probably the closest thing to it would be what’s called Stablecoin. Now Stablecoin, a cryptocurrency that’s backed by a commodity or another reserve currency, even though they’re privately issued. So they have the privacy of Bitcoin, but with the sense of security that comes with that backing, but the problem is with the Stablecoin, that backing can fail.

They may have issued too many of them. There’s too many things that can go wrong, so there are those who would insist that this digital currency exists in form, if not in reality, but that’s probably not exactly true. Some countries, especially reserve currencies, are going to want to be able to enable people to have anonymized cash. Now, there’s a whole sector of society in governance that’s opposed to anonymized cash. They’re opposed to it because of course it’s used for things like crime, illicit transactions and trade. But sometimes there are legitimate reasons for anonymized cash and that border is extremely muddy and can affect jobs industry and whether or not certain trade comes to your nation or your city or your state versus somewhere else. So this is going to be a tricky area for our legislatures to navigate.

Frankly, I think it’s a non-issue. I think it’s a non-issue because we have real cash, we have crypto coin, and we have debit and credit cards that are those transactions. This is filling a very niche area. In fact, if it’s interesting in any way, it is that it is the Trojan horse that would be used for the government to bring in its own state-backed cryptocurrency. I don’t see that happening overnight or certainly not adoption, and the reason is crypto has its own problems. It’s either extremely energy inefficient or it’s more hackable. Now Ethereum, without getting into the technical side of things, is attempting to solve some of the problems with crypto, but until those problems are solved, this Trojan horse is not something I’d be concerned with, and I’m not sure I’d be concerned even if it did exist. It’s a bit of a non-event. There’s a market for digital cash. There’s a market for anonymity. There’s a desire to do this more efficiently than with crypto. It’s a vacuum that will get filled, but is this a nefarious plot by the government to take your assets? No. The public’s not that stupid. If it became one, they would trade their digital currency for real paper cash or for real crypto. It’s going to be very hard for governments to abuse this. There will be a couple of other ancillary benefits. It will enable the unbanked to now have a way to have an account. There are other solutions to that and some have even been debated and there will be, theoretically, enhanced digital security.

So there you have it. A central bank digital currency. It’s pretty much as exciting as watching paint dry, and it’s certainly nothing for us to be losing any sleep over. This video is a result of a question from a client. If you have any questions that you think would make an interesting video for some, if not all of the viewership, please go ahead and email me with your questions. We wish you the best of investing success. Thank you.



Founder & CEO at Avion Wealth

Paul is the founder and CEO of Avion Wealth, LLC. He leads a team of wealth managers in building and executing financial plans for high net worth individuals and families. Contact Avion Wealth to speak with a financial advisor.