Wednesday, 7 July 2021 — Albert Park

By Callum Newman Editor, The Daily Reckoning Australia

[3 min read]

• China understands CBDCs’ true potential
• Money without banks
• A threat to your wealth

Dear Reader,

Central bank digital currencies, or CBDCs, are becoming an increasingly hot topic of conversation — and for good reason. As Jim Rickards points out in today’s DR, CBDCs may be the future of banking and payments, eliminating cash in the process.

If cash disappears, there is only one way to escape digital confiscation of wealth, writes Jim.

Read on to find out more…

Best wishes,

Callum Newman,
Editor, The Daily Reckoning Australia

By Jim Rickards Editor, The Daily Reckoning Australia

Central bank digital currencies, or CBDCs, are different than cryptocurrencies such as Bitcoin [BTC], although the differences are often overlooked. CBDCs may be issued by central banks, but they are not new currencies. They will still be dollars, euros, yen, or yuan as they are today. Only the format and payment channels will change.

CBDCs will be digital only; there won’t be any paper money or cash allowed. Balances can be held in digital wallets or digital vaults without the use of traditional banks. A blockchain is not needed; the CBDC ledger can be maintained in encrypted form by the central bank itself without the need for bank accounts or money market funds. Payments can be done with an iPhone or other device, with no need for credit cards or costly wire transfers. CBDCs are coming fast and may be the future of banking and payments.

But there’s a dark side. If there is no cash, there is no anonymity. Governments will know your whereabouts and habits at all times simply by tracking your use of funds through the CBDC payment system. This can already be done to some extent by tracking credit card transactions, but the CBDC system will make state surveillance far more pervasive.

China understands CBDCs’ true potential

And this kind of surveillance is the real driving force behind the Chinese CBDC. China already uses facial recognition software, mobile phone GPS tracking, and the purchase of plane or train tickets to track its citizens. This surveillance can be used to detect anti-state activities and to arrest dissidents or anyone who does not strictly follow the orders of Chairman Xi.

China’s lead in the race to produce the first major CBDC is well-known. The Chinese CBDC is already being used in prototype form and may receive a global coming out party at the 2022 Winter Olympics to be held in Beijing. Recently, China has revealed an even greater ambition. China wants to take its rules for the use of CBDCs and make them the global standard.

Even if the US and Europe don’t agree, it’s likely that many Asian and African countries might agree in exchange for aid from China. That aid can, for example, take the form of access to scarce COVID vaccines. Once China’s totalitarian surveillance software is perfected, it can make it the standard for much of the world and facilitate intrusive 24/7 surveillance by every dictator and autocratic leader in the world. No doubt China would arrange to have access to the same surveillance information it was providing to client states.

While China may be the leader in the race to build CBDCs, the Fed has not been caught napping. The US Federal Reserve System has been working with scientists at the Massachusetts Institute of Technology to develop a dollar form of CBDC. The rollout of this new digital dollar may still be a few years away, but the implications are enormous.

Money without banks

A reaction to the proposed change has already begun. Major banks fear they will be completely disintermediated in the payments system. It may be the case that individuals will have their own personal accounts at the Fed from which they can pay or receive funds with the wave of an iPhone. Who needs bank accounts, cheques, account statements, deposit slips, and the other clunky features of a banking relationship when you can go completely digital with the Fed?

Mastercard and Visa are also concerned that their payment channels will be made redundant. An individual Fed account on your mobile phone could eliminate the 2.5% fees that merchant acquirers charge retailers to process your credit card transactions. Payments in general would be faster, cheaper, easier, and more secure than they are today.

Investors need to take these developments seriously. There’s more at stake than just customer convenience. Trillions of dollars of wealth in the form of financial institution stock prices of companies such as JPMorgan, Citi, Mastercard, and Visa could be wiped out as the new digital payment technology takes hold.

A threat to your wealth

Banks and other financial institutions dominate stock market valuations today alongside the tech sector. CBDCs may be coming for the banks. Investors should watch developments closely and be nimble when it comes to getting out of financial stocks before the digital dollar eats their lunch.

The endgame for CBDCs would closely resemble George Orwell’s dystopian novel Nineteen Eighty-Four. It would be a world of negative interest rates, forced tax collection, government confiscation, account freezes, and constant surveillance. If cash is gone, there is only one way to escape digital confiscation of wealth — physical gold.

Regards,

Jim Rickards,
Strategist, The Daily Reckoning Australia

PS: This content was originally published by Jim Rickards’ Strategic Intelligence Australia, a financial advisory newsletter designed to help you protect your wealth and potentially profit from unseen world events. Learn more here.