Welcome to our Friday mailbag edition!
Every week, we receive fantastic questions from your fellow readers. And every Friday, I answer as many as I can.
Up first today, a question from reader William on paying bills if some states prohibit central bank digital currencies (CBDCs)…
If a state passes a law to prohibit CBDC payments, how would we pay bills that are outside of our state?
Wouldn’t we need both a CBDC account and a cash account?
Isn’t that a “catch-22”?
– William H.
Hi William, thanks for that excellent question. You bring up a great point.
Here’s the thing. When it comes to accepting money or using CBDCs, states only have jurisdiction over state-related payment functions.
Even that has restrictions. States can’t print their own paper currency, for example. We’ve written about what the Constitution has to say about this.
But a state can only exert control over how it chooses to receive payment of tax revenues, extra fees on unpaid or late taxes, or other debts to the state.
Let’s break that down a bit more. Take Florida as an example. Recently, Governor DeSantis signed a bill into law stating that Florida wouldn’t accept a CBDC for payments such as the ones I just mentioned.
Specifically, SB 7054 prohibits the use of a federal CBDC by excluding it from Florida’s Uniform Commercial Code’s definition of what money is. That bill also prohibits foreign-issued CBDCs in an effort to restrict a future global CBDC from accessing the private financial dealings of Florida residents.
Yet, that’s all Florida can do on this matter. Florida residents would still be able to make external payments, like federal tax, with CBDCs. They can also engage with businesses that only accept CBDCs.
Now, we’re years away from this scenario. But the national banks operating in Florida could decide that in order to stay chummy with the Federal Reserve, they will only transact in CBDCs. That means you would need to maintain a traditional dollar account with which to pay state or local taxes in Florida.
That could be a cash account with a smaller or community bank choosing to specialize in old-school dollars.
The other way to pay the state could be to use credit cards that enable either cash or CBDC payments. At this point, we don’t know exactly what credit card companies will do with CBDCs.
It’s very likely they will try to keep their foot in both doors… for facilitating CBDC or traditional currency payments. That’s simply good business practice.
Either way, you might need to keep a non-CBDC account. Or Florida might decide to cave on its legislation. We have yet to find out.
But FedNow will make all of these types of issues accelerate. And that’s why it’s important to plan for them.
For more information on how to position yourself ahead of a federally enacted CBDC… make sure you watch this video presentation I put together.
Next, reader Jim wants to know about the coexistence of physical cash and a CBDC…
I understand FedNow will be implemented soon and that a CBDC is inevitable, but I don’t understand why physical cash has to end.
Many businesses, especially corporations, will refuse cash payments and adopt the CBDC fully. But across many main streets, like in rural America, most folks would prefer to continue with the use of cash.
Why can’t they coexist?
– Jim S.
Hi Jim, thanks so much for your thoughts on this.
We really could be setting up for a battleground of corporations versus individuals when it comes to what constitutes money and how we use it. And FedNow has really upped the ante on thinking about these matters.
But here’s what we know so far. FedNow just went live yesterday. It has been tested by over a hundred major banks and businesses. And without FedNow and a rapidly processing national payment system in place, the infrastructure for a CBDC could not exist. Therefore, FedNow is a necessary precursor to a CBDC.
Now, as we’ve written, the implementation of a CBDC will be a long journey. There will be many steps between the launch of FedNow and the full adoption of a CBDC.
And you’re right – major businesses could choose to play ball with a CBDC and deny the use of cash. But I still believe many of them will allow different forms of money. For instance, Visa and Mastercard accept Bitcoin, so that tells me they will likely choose to diversify their payment systems to accommodate different customers.
This is something only time will tell.
The reality is that even if a CBDC is rolled out tomorrow, cash accounts wouldn’t immediately cease to exist. That’s because, as you said, many folks feel safer using cash for privacy and accessibility reasons.
There’s another reason why cash wouldn’t just go obsolete. And that’s because our banking system is simply not capable of this kind of abrupt switchover.
The evolution of a U.S. CBDC rollout will be just that… a large-scale and broad process that would unfold in steps from a logistical and technology perspective.
We don’t know exactly how that will occur, or what the time periods of testing various rollout points will look like.
But we do know this. Without the FedNow system in place, the Federal Reserve can’t continue to roll out a CBDC. This system is the necessary link between financial institutions and the Federal Reserve for payment processing activities.
We also know the digital dollar will enable the Fed to inflate our money supply more easily. That’s why we should prepare ourselves for the CBDC landscape and consider assets that help us protect our wealth.
Gold fits the bill perfectly. This precious metal is the ultimate form of wealth insurance. It has preserved wealth through every kind of crisis imaginable.
The best way to buy gold is with a combination of physical gold and gold stocks. You can buy physical gold online through accredited places like the U.S. Mint.
I actually wrote a piece detailing the best places and practices to buy physical gold. If you didn’t catch it, read up here.
You can also buy a gold exchange-traded fund (ETF) that is backed by physical gold. Gold ETFs offer the advantage of holding gold without the hassle of storing, securing, or transporting it. (I covered this in more detail in one of our mailbag issues.)
Lastly, I’ve identified my No. 1 gold pick for 2023 and beyond… and three “unprintable” plays to take advantage of the Fed’s adoption of CBDCs. For more information, go here.
Now, I’m with you on using cash. I regularly extract extra physical cash from my bank account that I know I’m not going to use. A stockpile of cash offers flexibility. It’s also convenient and saves me a trip to the ATM.
It’s also advice I’d offer everyone reading this. In addition to wealth protection assets like gold, keep a stash of cash. The more of us that do that, the more of us that can transact with each other in a real-life, physical manner.
Next, David is curious about how big banks benefit from FedNow and a CBDC…
Just how do the BIG banks gain from FedNow and a CBDC?
The narrative that I hear is that a CBDC could take the Big Banks out of the loop to a greater or lesser extent. Didn’t the Big Banks create the Fed to protect their interests? What can you make of this apparent conflict of interest?
– David P.
Hi David, that’s a terrific question.
We actually covered the relationships of banks to the Federal Reserve in a recent mailbag issue. Check it out here.
Overall, the relationship between banks and the Federal Reserve is strong. Banks, in fact, could benefit from the implementation of a CBDC… Here’s a snippet of what I wrote:
That aside, there are several reasons for member banks to be in favor of a CBDC…
For one, CBDC implementation will provide traditional banks with the opportunity to remain relevant in an increasingly digital financial landscape. By embracing CBDCs, banks can position themselves as key players in the evolving digital currency ecosystem.
As such, they’d remain proactive rather than reactive – or at the forefront of financial innovation.
Plus, banks and the Fed both see the digital dollar as a way to level the playing field in the payments ecosystem. And that, of course, is where the real money is.
At first, the big banks were skeptical of CBDCs and digital coins in general. In fact, JPMorgan Chase CEO Jamie Dimon was downright hostile towards Bitcoin as it became popular.
But you don’t hear that from him anymore. That’s because he couldn’t initially figure out a way to use Bitcoin to his advantage. So, it scared him to think he could lose customers to the allure of Bitcoin accounts, non-traditional or online banks, or financial apps like Square.
But since then, JPMorgan Chase, other banks, and financial companies have embraced Bitcoin – because they are seeing that many of their customers are.
But there’s something else to keep in mind.
You see, Wall Street created the Fed. I wrote about this extensively in my book All the Presidents’ Bankers. I actually visited Jekyll Island, where the Fed was first conceived, as part of my research for that book. You can find an excerpt in these pages here.
The point is, part of the unwritten but understood deal for banks like the Morgan bank (now JPMorgan Chase) was that the Fed would help them with liquidity – or a flow of money – if they were ever in a bind, like a bank panic or financial crisis.
That’s why there’s a virtual financial service, called a Fed window or discount window, that was inserted into Federal Reserve legislation. It’s not a real window, but you can visualize it as one.
Put simply, a big bank can go up to this virtual window and ask the Fed for money, and the Fed prints it. Nowadays, it does this electronically. And if the Fed fully implements a CBDC, then this window would provide banks with CBDCs.
This would allow banks to keep accessing liquidity when they need it. They don’t care what form that liquidity, or money, takes.
What that means is if the Fed wants to create money for them in another way, they’ll get on board. And if a CBDC is the route to that money – they’ll smile and say thank you. That’s why you shouldn’t count on the big banks to fight what the Fed wants.
Finally, our last question is from Barb, who wants to know about brokerages that aren’t set to use FedNow…
Are there brokerages that aren’t signing up for FedNow? I understand Fidelity has volunteered to go with FedNow, i.e. CBDC.
– Barb
Thanks for your question, Barb.
But before I address that, let me clear something up first. FedNow isn’t actually a central bank digital currency.
FedNow is a new digital payments system that enables settlements between banks in real-time. Using FedNow, businesses and people will be able to send and receive instant payments 24/7, 365 days of the year.
But while FedNow may not be a CBDC, it’s certainly a precursor to one. The instant payments system actually went live yesterday.
Here’s what Ken Montgomery, first vice president of the Federal Reserve Bank of Boston and FedNow program executive, said about FedNow in a recent announcement:
Availability of the service is just the beginning, and growing the network of participating financial institutions will be key to increasing the availability of instant payments for consumers and businesses across the country.
So, by the Fed’s own admission, this is just the beginning…
The Fed is clever. By expanding its payments system to include more institutions, it can get people to rally behind an eventual Fedcoin.
Keep in mind that FedNow is supposed to be a win for consumers… They’ll be able to make cheap and instantaneous payments.
But what it actually does is bring us closer to the rollout of the digital dollar.
And FedNow brings about a scary proposition. The technology gives the elites new powers – for the first time ever – to track every dollar you spend.
That’s why it’s important to understand what’s happening… so you can come out ahead.
Now, to answer your question about brokerages…
I don’t have the inside scoop on which brokerages are skipping out on FedNow…
That’s because we just don’t know so far. It’s also likely that brokerage houses themselves don’t know how everything will work in practice. As more of them share their decisions, we will continue to let you know…
That being said, there are plenty of reasons for most brokerages to consider jumping on board with FedNow.
Participating in FedNow, as a real-time payment and settlement system, could offer benefits like faster and more efficient fund transfers, better liquidity management, and potentially more satisfied customers.
And here’s the deal…
If brokerages see those benefits lining up with their business goals and the potential for gaining a competitive edge, they’ll waste no time signing up for FedNow.
And unfortunately, as a consumer, you don’t have a say in whether FedNow will be extended to you. But you can reach out to your financial institution to ask if they are planning on using the FedNow service.
If you’re worried that with FedNow in place, your brokerage account may no longer be safe or somehow compromised… Let me assure you that you’ll still be able to invest like you do now, even in the “new normal” shaped by FedNow.
Remember, Wall Street collects billions in fees from asset management. They need a constant influx of new investors to keep their wealth flowing.
They will not let anyone kill that golden goose.
So you can count on still being able to use your brokerage account to make investments.
And that’s all for this week’s mailbag. Thanks to everyone who wrote in!
If I didn’t get to your question this week, look out for my response in a future Friday mailbag edition.
I do my best to respond to as many of your questions and comments as I can. Just remember, I can’t give personal investment advice.
And if there are any other topics you’d like me to write about, I’d love to hear from you. You can write me at [email protected].
Happy investing… and have a fantastic weekend!
Regards,
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Nomi Prins
Editor, Inside Wall Street with Nomi Prins
P.S. A CBDC is closer than you might think…
That’s because the Federal Reserve just unleashed the foundation of an all-digital dollar. I believe it will mark the end of our money as we know it.
The good news is, if you position yourself ahead of this trend, you can benefit from this historic shift…
In fact, I’ve found one-little known asset that can help you emerge as a winner. It has the potential to deliver as much as 50x profits.
I put the details in a video presentation I released. To watch it, click here.