There are a lot of discussions about Central Bank Digital Currencies (CBDC). Most countries are looking at the possibility of implementing them.
Many feel these are a foregone conclusion. After all, people are led to believe that governments control money. The reality is that currency is not in the governments control. To go one step further, in the digital age, even the central banks are not in the currency business.
That would change with a CBDC. Of course, it would set off a major problem with the commercial banking system, which is what owns the central banks. Herein lies the major problem for the banks.
Leaving that aside, we do have push back. Here again, we see governments stepping in, adding fuel to the government narrative. In the United States, Missouri is the latest state to take up the idea of making CBDC illegal by law.
This makes for interesting viewing. However, it is not the crux of the story.
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Why CBDC Will Fail
The reason why CBDC will fail reverts back to the origins of currency and why it exists.
If we step back in time, currency was developed to facilitate trade. It was adopted by merchants as a means of engaging in business transactions. This was a step away from the old barter system.
Therefore, it was merchants who pushed the entire premise of money. This has not changed in thousands of years.
So where did the narrative about governments enter? And why is it important in this discussion?
During the era of physical money, this allowed governments to step in. Since it could regulate the coinage, monarchies inserted themselves into this. There was also a feasibility component. Realistically, farmers and small business people were not going to run the mint. This has to be undertaken by someone with the wherewithal to get the materials and turn it into coins.
It also required the decree to make that the currency of the land.
This all changed as technology advanced. Even today, the money supply (i.e. legal tender) is not controlled by central banks. Instead, under fractional reserve banking, it is the commercial banks that expand it.
Here is where the public/private tug-o-war takes place. It is also why CBDC will fail.
Global currencies
Within the existing system, there is one global currency: the US Dollar. Nothing else comes close to it. The EURO, which is ranked number 2, is nothing more than a regional currency.
Cryptocurrency alters this. Each one is global by default. They are built on networks that are all over the world. Anyone can access them simply by having a wallet.
Here we see a massive shift away from the geographic based system. The digital world does not care where someone is located. Each of use is not determined by where one is physically. Also, the local laws mean nothing. Crypto networks are driven by the code, not government laws.
Therefore, if Venezuela brings out a digital bolivar, does it matter? Would people there use it? My guess it would be minimal. Citizens of that country would prefer something like USDC or Tether to the bolivar, whether it is a CBDC or not.
Gresham's Law
Many have heard of the theory called Gresham's Law. This states that "bad money drives good money out".
Here again, we are dealing with an obsolete concept.
The observation was made during the era of physical currency. When kingdoms ran into financial difficulty, they started to add in alloys into the coinage. This lowered the metallic value while the face denomination was the same. Hence, people would use the lower value coins while hoarding the ones with higher metallic content.
Of course, we no longer use physical coins. At this point, even cash is mostly obsolete.
The digital world makes Gresham's Law invalid. Anyone with a smartphone has a choice of thousands of currencies to utilize. This means that government control is waning even more.
This will be further expanded as the capabilities of digital wallets expands. At some point, I forecast that we will see instant conversions via wallet. They will be tied to DEX so that it is automatic.
In this instance, lets say a merchant wants payment in USDC. If the wallet is only holding Tether, the transaction will include a swapping of tokens. Under this scenario, it doesn't matter what is used for payment as compared to what the vendor requires. The transaction will occur as if it was the same currency.
Trust and Confidence
It is easy to see why governments are pushing for CBDC. Politicians and bureaucrats are foaming at the mouth to control the money supply. Personally, I think this is going to pit the banks against the politicians.
We are in a period where the confidence in government is collapsing. The next decade will see a major shift from public to private. This will occur with assets, i.e. stocks and commercial debt being more appealing than sovereign bonds.
It is also going to affect the choice in currency.
People will flock to what they trust. Will someone hold a currency that can be frozen by governments? This is not likely when other options are available.
We are already seeing how this is going to unfold. Individuals heavily involved in cryptocurrency are the examples of what will be commonplace over the next decade.
Heavy users operate in the crypto world. They engage in cryptocurrency, swapping in and out of different coins and tokens. They remit, trade, and HODL different currencies. All of this operates outside the existing financial system.
The only time that world is encountered is when fiat currency is required. This might mean the payment of some bills, hence crypto is swapped using a Binance or Coinbase into USD or JPY.
It is fairly common for crypto companies to pay many of their bills, including salaries, using cryptocurrency.
When dealing with thousands of global currencies, the choice for people is nearly unlimited. Out of that batch, there are a number which instill a great deal of confidence.
The same is not true for governments. We see record low rating for politicians. The new Trump administration is targeting the bureaucratic state in the United States government.
Government employees no longer are held in high regard, being civil servants who looked to serve. Instead, most realize they are part of a machine that is hindering the progress of many nations.
If confidence in these people is waning, why would people utilize a currency that is being pushed by the same establishment? When there are options, people will simply engage with the CBDC only when necessary. For all other transactions, other currencies will be selected.
The total market capitalization of cryptocurrency, according to CoinGecko, is $3.69 trillion. What happens when that number is $50 trillion? Cryptocurrency can multiply which is fortunate in the age of AI and the shift towards the agentic Internet. If we arrive at an economic singularity in the next 20 years, the amount of currency necessary to facilitate the transaction will be mind-boggling.
Governments are simply too slow. They are not designed for the digital world. We see the attempt at relevance through the entry into the digital with a native token (CBDC) yet still controlling via the established legal mechanism.
It isn't going to work.
This is also why CBDC will fail. They simply are not designed to succeed in the rapidly advancing digital age.