CBD and C Digital Currency
If you are not familiar with the acronym CBD, it stands for Cannabidiol. Also know as cannabis. Also known as marijuana.
CBD is a derivative (investment word!) of the marijuana plant.
I see CBD products in the pharmacy, local grocery stores and online. Today I saw CBD and Hemp chews for dogs. CBD dispensaries have opened across the nation. And you thought it was just legal in California?
Is that right? Yes, CBD is fully legal in 35 states, restricted in 14 states and illegal in 3 states. [1]
Don’t get too excited though. I’m not going to talk about CBD as an investment opportunity.
This article is about a different acronym, CBDC.
I would say a very unfortunate acronym but here it is:
CBDC stands for “Central Bank Digital Currency.”
I started 2022 with the decision to learn everything I could about cryptocurrencies.
It is a steep learning curve. There are hundreds, no, thousands of articles, websites, books, and podcasts on the topic.
Then I started seeing articles about Central Bank Digital Currency. And a whole NEW learning curve has emerged. What is it? How does it work? Who uses it?
And, like cryptocurrency, I find it fascinating. We are witnessing a structural change in the way we use money.
Currently the US does not have a CBDC. It is a work in progress.
There are several reasons for central banks to consider using CBDC.
The first reason is the widening use of digital payment systems. Digital payment systems are not free. Businesses are charged a fee for the use of credit and debit cards. Sometimes those fees are passed on to the consumer through higher prices.
Second, in many countries and economies, including the US, there are people who do not have access to digital payment services. If someone does not have a payment card or a smartphone they cannot make digital payments. There are people who do not have bank accounts. Digital payment services exclude a percentage of the population.
Third is data governance and privacy issues. We know that both financial and non-financial firms have been subject to “hacks”. To create fair and transparent payment systems to be all inclusive, the use and storage of data should not be concentrated in the hands of a few.
“Central bank interest in CBDCs comes at a critical time. Several recent developments have placed a number of potential innovations involving digital currencies high on the agenda. The first of these is the growing attention received by Bitcoin and other cryptocurrencies; the second is the debate on stablecoins; and the third is the entry of large technology firms (big techs) into payment services and financial services more generally.”
The Bank for International Settlements (BIS) Annual Report 2021 [2]
Central Bank Digital Currency is not a replacement for the use of cash. The concept is that CBDC is an enhancement to the use of cash.
Cash is still cheaper to use than paying fees charged for payment services.
Although CBDC does not yet exist in the US, there are a few things that it is, and is not.
Central Bank Digital Currency is not cryptocurrency. It is not a Stablecoin, and it is not an NFT. Sorry Bored Apes.
CBDC is a way to digitize cash ( and coins) and a way to improve payment systems.
CBDC can be used by ANY central bank. Currently only 9 countries have adopted CBDC. 15 countries have started pilot programs, 16 countries are in development and 40 countries, including the US are in the research phase.[3]
The Bank for International Settlements is the bank for central banks. The BIS reports on financial and monetary policies. In the 2021 Annual report there is a great section on Central Bank Digital Currencies. Many of the reports I read on CBDC cited this specific annual report.
Key takeaways from the BIS report:
• Central bank digital currencies (CBDCs) offer in digital form the unique advantages of central bank money: settlement finality, liquidity and integrity. They are an advanced representation of money for the digital economy.
• Digital money should be designed with the public interest in mind. Like the latest generation of instant retail payment systems, retail CBDCs could ensure open payment platforms and a competitive level playing field that is conducive to innovation.
• The ultimate benefits of adopting a new payment technology will depend on the competitive structure of the underlying payment system and data governance arrangements. The same technology that can encourage a virtuous circle of greater access, lower costs and better services might equally induce a vicious circle of data silos, market power and anti-competitive practices. CBDCs and open platforms are the most conducive to a virtuous circle.
• CBDCs built on digital identification could improve cross-border payments, and limit the risks of currency substitution. Multi-CBDC arrangements could surmount the hurdles of sharing digital IDs across borders, but will require international cooperation.
This is what I question:
The donut shop that only accepts cash. Will they be forced to use digital only payment services, at a greater cost?
The businesses that want a check. If you want to use a credit card you are charged an outright fee. This is an example of passing on the fees credit card companies charge directly to the consumer.
The businesses that no longer accept cash. I really question the wisdom of this decision. For small transactions not accepting cash is not client friendly. The business is effectively saying “we don’t want your business”.
All the people in service industries that rely on cash tips. I’m assuming they will still accept cash.
Non-Financial Payment Systems
I use STRIPE on my website for subscriptions. STRIPE is not a bank. It is a payment processing application.
Many of the websites you go to use an application like STRIPE. You may not notice who is providing the service when you enter your credit card information.
STRIPE is an example of a financial services company that is not part of the banking system.
Where things can go wrong:
My fourth ex-gardener signed up to use a payment processing service so customers could pay online. The service he chose had some serious technical difficulties. One month I used my Amex card. He claimed he never received the payment. Amex clearly showed that his business had been paid.
Now it is up to him to deal with the payment processor because as far as Amex is concerned, the bill was paid.
Choosing a reliable payment processor is critical for small businesses. However, some of the payment processors are expensive . That is one the reason small businesses do not want to use them.
CBDC would give individuals and businesses an alternative to expensive payment processing systems.
Now you know your C-B-D’s and C’s.
[1] CBD Legal States 2022 (worldpopulationreview.com)
[2] BIS Annual Economic Report 2021
Bank for International Settlements , pages 65-92
[3] Central Bank Digital Currency Tracker – Atlantic Council
Money and Payments: The U.S. Dollar in the Age of Digital Transformation (federalreserve.gov)
Project Hamilton Phase 1 Executive Summary – Federal Reserve Bank of Boston (bostonfed.org)
Speech by Governor Brainard on central bank digital currencies (federalreserve.gov)
This website is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security, nor does it constitute an offer to provide investment advisory or other services by The Modest Economist LLC.
