Central Bank Digital Currencies
Niels Clemen Jensen is the founder and Chief Investment Officer of Absolute Return Partners. Every month he writes a great investment letter than I read and learn a lot from.
In addition to the monthly letter, he also has a paid subscription service called ARP+ due to European regulations that prohibit how deep his analysis can go in his free monthly letters.
I would recommend subscribing to ARP+ if you are in the investment business and definitely read his megatrend papers where Niels analyzes what effect the biggest trends going on in the global economy right now are going to have for investors.
Megatrend papers: https://www.arpinvestments.com/megatrend-papers
Here is Niels’ interesting letter for the month of July on central bank digital currencies:
https://www.arpinvestments.com/arl/govcoin
And here is my summary below:
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In order for money to be proper, it must be issued by a central bank and have low volatility.
Therefore Bitcoin, Ethereum and probably all of the other crypto currencies aren’t proper digital currency because their prices are all too volatile.
Niels says that just because Bitcoin, Ethereum and other crypto currencies aren’t proper cryptocurrencies, that doesn’t mean that they are bad investments, they just aren’t currencies.
The Bank for International Settlements (BIS) is the central banks of central banks.
A survey done by BIS found that most central banks are exploring the idea of launching a digital currency that is backed by a central bank but the central banks of many of the biggest and supposedly sophisticated countries are behind in issuing a central bank digital currency.
This includes the U.S. who has done some research on central bank digital currencies but isn’t ready to issue one yet and also the big five European countries (Germany, France, Spain, UK and Italy) who haven’t made much progress either.
The closest country in Europe to have a central bank digital currency is Sweden who could possibly have one issued as soon as 2023. The Swedish Parliament will vote on this in 2022.
The Bahamas have already issued a central bank digital currency called Sand Dollars but the clear leader in implementing a digital currency is China who currently has a pilot program going on that gave almost 500,000 Chinese citizens a central bank digital currency called e-yuan that can be spent in some outlets by scanning an app on their smartphone.
Positives of going to a digital currency:
Supposedly lower taxes over time due to the elimination of the shadow economy where lots of transactions are not taxed. (Positive for law abiding citizens)
Negatives of going to a digital currency:
Much more control from "big brother" over all your activity. "Big brother" can know what you ate for dinner if they want and based on spending habits, possibly even who you're eating dinner with.
By not doing more to test a digital currency, the U.S. could be risking the dollar's position as the premier reserve currency of the world because a digital currency could be much cheaper to transact with (almost no cost) so lots of people who regularly transfer money internationally - which are mostly poorer people in emerging markets - could switch to the new digital currency that is almost cost-free.
This is important to the U.S. because having the world's reserve currency allows them to run large trade deficits for many years without much effect to the price of the dollar.
A fully and successfully implemented central bank digital currency could put almost all commercial banks in jeopardy because all of the citizens’ money could be held directly at the country's central bank instead of at a commercial bank. Money transfers could be tracked on the blockchain and sending money to others via a central bank digital currency would very likely be much cheaper than it is today with commercial banks.
A central bank digital currency could create a bank account for the 1.7 billion people in the world who currently don’t have one and according to the Economist, it could cut the operating expenses of the global financial system by $3 trillion annually by eliminating the fees charged by commercial banks.
Niels Jensen thinks that central bank digital currencies are coming soon (with some central banks acting quicker than others) because the advantages of digital currencies are just too obvious to pass up.