If you follow the mainstream media, you’ve likely seen the headlines…
“Digital U.S. Dollar Looks ‘Inevitable,’ Bank of America”
“A Cashless Society Is Imminent”
“Visa Offers Restaurants $10,000 dollars… if They Stop Accepting Cash”
But if you’ve been following our work, you were probably already aware of policymakers’ desire to move away from physical cash and towards a digital dollar.
Nonetheless, from some questions I’ve received in the mailbag – as well as what I’ve been hearing at my various speaking engagements and meetings – I feel there’s quite a bit of confusion out there about what a digital dollar will likely look like.
So today, I’m going to look beyond the headlines – and clear up a few key aspects surrounding this subject and show you what it means for you.
The Fed Coin
In November 2019, the Federal Reserve wrote an open letter to policymakers. Fed Chair Jerome Powell said the Fed was analyzing “the costs and benefits of pursuing a digital currency in the U.S.”
Then, in 2020, Senator Tom Cotton said something interesting during a Senate Banking Committee meeting:
The U.S. needs a digital dollar… The U.S. dollar has to keep earning that place in the global payments system. It has to be better than Bitcoin… it has to be better than a digital yuan.
During the pandemic the perceived benefits of such a digital dollar became even clearer to policymakers.
And so soon enough Congress made it explicit. That’s when the Digital Dollar first appeared in a bill that Nancy Pelosi introduced.
The idea was for the Federal Reserve to create and manage a centralized digital currency to facilitate Covid-19 stimulus payments. This would have been a major expansion of the Fed’s power.
Every U.S. resident was to get a Digital Dollar Wallet that they could manage on their phone and into which the Fed could deposit stimulus money.
While the Digital Dollar provision didn’t make it in the final version of this bill, it has reappeared in other legislation and in Senate committee meetings since.
And, as I write, the push for the Fed coin continues.
Earlier this year, for instance, the Fed and the Massachusetts Institute of Technology (MIT) concluded the first phase of a project analyzing the merits and technical feasibility of a digital dollar.
Scientists working on the multi-year project, dubbed “Project Hamilton,” created a code that is capable of handling 1.7 million transactions per second.
They also found the “vast majority” of transactions settled in under two seconds.
This came on the heels of the Fed’s long-awaited study exploring the pros and cons of a digital dollar.
The paper shied away from any conclusions, but it did suggest that a digital dollar would be a more efficient online currency than crypto. This brings us to…
Cryptocurrencies surged in popularity partly due to their use in real-time, peer-to-peer payments. A digital dollar could potentially offer the same.
Transactions using a digital dollar could be used for everything from buying groceries to receiving government checks.
This means that the government could deposit stimulus checks directly into people’s digital wallets in times of need through the Fed. No more waiting weeks for a physical check.
The same goes for small businesses applying for emergency loans through government programs.
No more waiting weeks for the funds to go from the Treasury Department… to the bank headquarters… to the local bank where the loan originated… and finally, to the business owner.
Instead, funds could be deposited directly into digital wallets assigned to these businesses.
The digital dollar would be issued by the U.S. Federal Reserve, like all the U.S. dollar bills we use now. It would just be in a digital form.
That said, for the same technological reasons, it’s even easier to fabricate a central bank digital currency (CBDC) out of thin air than a fiat currency.
So, if the government needed to create more money, it would be even easier than it is right now.
And as we know, the more of something there is in supply, the less valuable each unit of it becomes.
And there’s another reason to be concerned about the arrival of a digital dollar. As I previously explained in one of my mailbags, CBDCs would help strengthen central banks’ power over the financial system.
That’s because CBDCs will be highly centralized and capable of processing more related information faster. This brings us to…
With a digital dollar, the government could have complete knowledge of – and control over – every transaction you make.
The possibilities and implications are limitless. They range from taxation to interest rates. But, again, we just don’t know for sure at this stage.
This theoretically means that, if you do something the government doesn’t like, they could be able to turn off your ability to transact at the push of a button, or they could charge your account.
At that point, the government could have almost unbreakable financial control over the individual. Moreover, they could be a step closer to redistributing the country’s wealth any way they saw fit.
As former U.S. representative Dr. Ron Paul said:
The cashless society is the dream: total knowledge of, and control over, the finances of every single American.
What This Means for Your Money
I think it’s inevitable that the U.S. will adopt a digital currency form of the dollar at some point. I also think that it’s easier said than done to connect all citizens in the country directly to the Fed for financial transactions.
This won’t happen tomorrow. But I think it’s more a “when” than an “if.”
In fact, it’s probably happening much faster than you think…
Biden’s Executive Order on crypto – which I wrote to you about back in March – is a case in point. Earlier this year, it called for the highest urgency in the U.S. to digitalize the dollar.
So, if you ever need another reason to add Bitcoin as a speculative asset in your portfolio, this is one.
The advent of a digital dollar will invariably cause a rise in technological know-how of how cryptos work. As people become more comfortable with the Fed coin, it will become easier for them to adopt Bitcoin.
Put another way, a digital dollar could become the perfect trigger to cause more widespread adoption of Bitcoin.
Now, Bitcoin is a volatile asset that undergoes periods of violent swings. But even though it’s had a tumultuous year, the Bitcoin price remains range bound as of late. Many stocks have fared worse.
That said, this still isn’t the time to dive in headfirst.
Instead, we recommend investing a fixed amount of money on a regular basis, typically monthly or bi-weekly.
That way, you can buy more when the price is low and less when prices are high. This is called dollar-cost averaging.
PayPal or Block’s (previously called Square) Cash App is one of the most convenient options for doing this. With these popular apps, you can start your Bitcoin portfolio with as little as $1.
Another way is to purchase Bitcoin on a crypto exchange such as Coinbase and simply store it in a crypto wallet.
But, again, remember that Bitcoin is a speculative asset. A small investment can go a long way. So don’t ever invest more than you can afford to lose.
Editor, Inside Wall Street with Nomi Prins