Weekly Mailbag: What Do CBDCs Mean for Bitcoin?

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 Tony on exchanging Bitcoin in the wake of a federal-mandated central bank digital currency (CBDC)…

If and when the Fed institutes their CBDCs that can control our checking and saving accounts… my concern is what would stop them from limiting us from buying or selling our Bitcoins into CBDCs? If they can restrict us from buying gas for our cars, steaks for dinner, use of our air conditioners, etc., what would keep them from limiting us in exchanging Bitcoin to or from our checking or saving accounts?

– Tony G.

Thanks for your question, Tony!

You’re essentially talking about a ban on Bitcoin.

Now, I know the idea that the U.S. government will ban Bitcoin is a popular one – and for good reason. Crypto could threaten a major source of the government’s power – the power to create money out of thin air and force everyone to use it.

That said, that situation is still a long way off. The crypto space, as it is right now, poses no existential threat to the survival of the central banks.

It would also be impractical for the government to ban Bitcoin and other crypto assets.

For one, it doesn’t want to miss out on any income from the industry. The crypto market is no longer just a fad. It has increased substantially in recent years. At writing, despite the prolonged bear market, crypto’s market capitalization stands strong at $1.2 trillion. That’s a lot of taxable revenue.

Under the current tax code, if you hold Bitcoin or any other crypto for 12 months or less, you must pay short-term capital gains tax (CGT) on any profit made on the sale. That’s up to 37%, depending on your circumstances. And if you hold it for more than 12 months, your profits are subject to long-term CGT. That’s up to 20%.

That’s not to say that the government can’t restrict things by prohibiting the buying and trading of Bitcoin. And the introduction of a central bank digital currency could offer them an easier way to do just that.

I’ve talked extensively about how a digital dollar would give the government and Fed unprecedented financial control over your life.

Theoretically, if you do something the government doesn’t like, it could turn off your ability to transact at the push of a button.

And if that happens to be trading Bitcoin, limiting your ability to buy or sell it is not beyond the realm of possibility.

But I think we have to be mindful of the fact there’s a lot of uncertainty surrounding CBDCs. It’s still not “official” in the U.S. And other countries that are implementing CBDCs have different approaches, making it hard to predict what could happen in the future.

Once again, I don’t believe the government will outright ban Bitcoin transactions with CBDCs. But here are some methods they could use to limit them:

• Smart Contracts. Regulators might leverage the capabilities of smart contracts within blockchain-based CBDCs to define specific conditions that hinder or limit the conversion of CBDCs to Bitcoin.

• Blacklisting Addresses. They could maintain a list of blacklisted cryptocurrency addresses. CBDC systems could be programmed to prevent transactions to or from these addresses. This would effectively restrict the flow of funds between cryptocurrencies and CBDCs.

• Taxation and Reporting. The government could introduce tax regulations on cryptocurrency transactions, making it less appealing or more complicated for individuals to convert their Bitcoin into CBDCs.

But none of this will happen overnight.

Why?

Well, some of these measures would require a major bipartisan regulatory overhaul of our financial system. And I just don’t see it happening.

So if government officials try to take action on Bitcoin, they will likely face legal challenges based on constitutional, human rights, or regulatory grounds. And, as “the people,” we, too, can and should play a crucial role in keeping our leaders in check and pushing for more (not less) personal freedom.

Speaking of personal freedoms, the adoption of the digital dollar could shift people’s preferences towards digital currencies. And, in turn, this will accelerate Bitcoin’s mass adoption.

That’s because as people become more familiar with digital currency through the digital dollar, it will naturally make them more open to exploring Bitcoin. So, if you’re looking for another reason to add Bitcoin into your investment mix, this is one.

As I write this, the price of Bitcoin is still down about 55% from its November 2021 all-time high of about $68,000. And that’s a good thing. It means you can still buy it at lower prices before big financial institutions like BlackRock swoop in.

But rather than dive in headfirst, 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 are some of the most convenient options for doing this. With these popular apps, you can start your Bitcoin portfolio with as little as $1.

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.

Next, reader Gwen wants to know about credit unions and investment firms under FedNow… and the safety of payment transfer software…

Will credit unions and investment firms fall under FedNow? Would it be best to transfer one’s checking account out of banks and into a checking account at a brokerage?

Secondly, given recent ransomware attacks by CLOD exploiting weaknesses in payment transfer software, is the Fed ready to underwrite the security of the funds transfers? So far, no bank has the back of the consumer.

– Gwen M.

Thanks for writing in, Gwen! And I appreciate your questions.

For readers that may not be familiar with FedNow, it’s 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 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.

The government could easily identify:

• Who’s spending dollars…

• What they’re buying…

• And who they’re buying from…

FedNow just went live last week. It has been tested by over 100 major banks and businesses. And there are around 40 banks and credit unions that have completed certification to use FedNow as early adopters, at writing.

There are also thousands of U.S. financial institutions that may choose to take part in the FedNow network… eventually. This includes banks, credit unions, investment firms of all sizes…

And there are plenty of reasons for them to consider doing it.

Here’s why…

Participating in FedNow, as a real-time payment and settlement system, offers benefits like faster and more efficient fund transfers, better liquidity management, and potentially more satisfied customers.

And if said institutions see those benefits lining up with their business goals and for gaining a competitive edge, they will join FedNow.

So, sadly, you don’t have a say in whether FedNow will be extended to you. That’s because as an ordinary person or business, you won’t directly interact with the FedNow system.

But what you can do is reach out to your financial institution to ask if they are planning on using the FedNow service.

As for whether you should transfer your checking account out of banks and into a checking account at a brokerage… Please remember that I can’t give personalized advice. But in general, that’s a decision that depends on things like your financial goals and overall investment strategy.

But here’s the thing…

For all we know, your brokerage might already be part of the FedNow system.

So, once again, the best approach would be to directly reach out to the financial institution you’re interested in and have a conversation with them.

On to your second question about the Fed’s willingness to “underwrite the security of the funds transfers” in case of a cyberattack…

While the Fed has likely put in some serious effort to make FedNow safe and secure, no system is 100% hacker-proof. That’s just the reality of things.

In this case, however, the responsibility for security will probably fall on the financial institutions that participate in the system. The Fed will likely give them some guidelines and protocols to follow, but if a hack happens, the Fed won’t be the ones footing the bill.

It’ll be up to the individual banks and other financial firms to investigate, recover, and potentially reimburse affected customers based on their own rules.

Finally, our last question this week comes from reader Stephen who wants to know what Americans should do when a CBDC is implemented…

I have a question that I think many of us are thinking about. Let’s say the U.S. CBDC is implemented and cash is being eliminated. Just because we make lots of profit from the move you propose, people still have to operate in this new, emerging system.

We have significant concerns about this system. What could we do to care for our families and do business? Are there alternatives to operating in this new, likely highly controlled system? Or are you thinking we just accept the new system and do our best to care for our families? A number of liberties are on the line here, as I understand this.

A second question is – Have you considered what people in the U.S.A. will do about this change? Many will not go willingly down this new path. That likely will result in significant turmoil at every level of the system.

– Stephen B.

Hi Stephen, thanks so much for your thoughts on this.

As we’ve previously 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.

The reality is that even if a CBDC is rolled out tomorrow, cash accounts wouldn’t immediately cease to exist. That’s because many folks feel safer using cash for privacy and accessibility reasons.

Yes, some 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.

That’s not to say that the push away from cash is far-fetched… It’s definitely already happening. But, rest assured, the Fed can’t simply flip a switch and mandate exclusive CBDC usage overnight.

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 technological perspective. It will be a gradual process with numerous actors (and factors) at play.

Granted, if your landlord is no longer willing to accept your check or cash, that means you won’t be able to swing by their office and pay that way.

But, again, on a large scale, the switch will be a gradual process…

I continue to expect cash and checks to remain in use alongside electronic payment methods for the foreseeable future.

It’s important to keep in mind that the appeal of physical cash is still strong, despite the ongoing push for a CBDC. One example is cash-to-card services that convert physical money into prepaid debit cards or electronic payments. Banks, too, already let you deposit checks using your phone through mobile check deposit services.

These kinds of services help bridge the gap between the digital world and good ol’ cash. And they aren’t going away anytime soon…

Now, do we embrace the forthcoming “new normal” or do we fight it?

In my view, neither extreme is necessary; instead, let’s acknowledge it for what it truly represents: an unprecedented challenge to our freedoms, but also an opportunity.

For one, the introduction of a digital dollar could spur greater adoption of Bitcoin. As people become more familiar with digital currency through the digital dollar, it will naturally pave the way for easier acceptance of Bitcoin.

At the end of the day, my role is to help you seize opportunities and profit regardless of the circumstances.

And as a citizen, it’s my belief that we can and should keep our leaders in check, while working towards more personal freedom as individuals.

Even as an ordinary person, you do have a voice. Many of us just choose not to use it. Here’s a quick rundown of several civic actions anyone can take to influence the advent of CBDCs in the U.S.:

• Engage with Legislators. Reach out to your local representatives and express your opinions and concerns about CBDCs. Your voice can influence policy decisions.

• Advocate for Privacy. Support organizations and initiatives that advocate for strong privacy protections in the digital payments space.

• Join or Support Advocacy Groups. Get involved with advocacy groups that share your views on CBDCs and collaborate to promote your collective interests.

• Participate in Public Forums. Attend town halls, public meetings, or webinars related to CBDCs and share your perspectives.

• Educate Others. Inform your friends, family, and community about CBDCs and encourage them to participate in the conversation.

Now, there are other ways you can prepare yourself for the eventual adoption of a CBDC. And that includes diversifying your portfolio into assets that can help protect your 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 another way to profit from gold. It has a history of turning every $10,000 invested into more than $850,000…For more information, watch my presentation about it right here.

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,

Nomi Prins
Editor, Inside Wall Street with Nomi Prins

P.S. Recently, I sat down in an interview with Daniela Cambone from Stansberry Research to talk about the launch of FedNow, its relation to gold, and how investors should navigate all this market noise…

I also explored how FedNow serves as a ploy for the central bank to increase its foothold in the digital currency space and how it affects the long-term outlook for the U.S. dollar.

To watch it, just go here.