How Do CBDCs Compare to Traditional Sound Money

The rise of the Internet has transformed the way many Americans conduct banking and financial transactions. According to the American Bankers Association, 77% of consumers prefer to manage their bank accounts through a mobile app or computer.

The Association also reports that most consumers approve of their banks’ digital offerings. Their findings showed that 96% of consumers found their mobile or online banking experiences as “excellent,” “very good,” or “good.”

In response to this increase in digital financial transactions, the Federal Reserve has considered issuing a CBDC, a type of digital currency. Many investors may know that digital currencies like Bitcoin are considered “sound money”, much like gold or silver.

While CBDCs have their uses, they are not the same as sound money investments. Each of these resources has advantages that it can provide.

What is a CBDC?

CBDC stands for “central bank digital currency.” It is a digital currency issued by a central bank, which in the United States would mean the Federal Reserve.

Currently, there are only two types of central bank money in the United States. These are:

• physical currency issued by the Federal Reserve
• digital balances held by commercial banks at the Federal Reserve

The Federal Reserve has not created a CBDC. However, it has considered the idea and put forward a report called Money and Payments: The U.S. Dollar in the Age of Digital Transformation.

The Federal Reserve says this document exists to foster dialogue about CBDCs and examine the pros and cons of such a currency in the US. There are potential advantages of digital fiat currencies, such as:

• can provide a medium for instant and seamless cross-border transactions
• its trackable nature can help deter financial crimes
• could potentially help unbanked people have more access to financial assets and digital transactions

Advocates of CBDC believe that these advantages make it an excellent asset for a country. However, there are downsides to CBDCs that make many investors and consumers wary of them. Some of those potential downsides include:

• reduced privacy, as the government can track any transaction made with this currency
• potential cybersecurity risks, as a large store of digital assets would be a promising target for hackers
• this currency could damage the commercial banking sector

Perhaps the easiest way to understand how CBDCs relate to sound money is to understand them as a digital fiat currency. As a result, it has many of the same differences from sound money that other fiat money might.

How CBDCs and Sound Money Differ

Generally speaking, sound money refers to tangible currencies with an inherent value. Usually, this means precious metals like gold and silver. Some financial experts also consider cryptocurrencies like Bitcoin to be sound money. We will address this subject as well.

Precious Metals

Gold and silver are not controlled by a central bank. Like other commodities, their value derives from supply and demand. There is a limited supply of precious metals, and a high demand.

This equation, combined with its decentralized nature, gives precious metals a fairly stable value. They are highly resistant to inflation. That resistance makes them an excellent investment for those seeking financial security.

Precious metals also have the benefit of being tangible. Many investors are more comfortable investing in assets they can hold in their hands and secure for themselves.

Another recommendation for precious metals is their place in the Economic Freedom Index. The Heritage Foundation considers sound money, especially gold and silver, essential to a country’s economic freedom. Proponents of these metals argue that they protect investors from government overreach.

However, there are some disadvantages to precious metals. One of them is its low liquidity. Although some states have accepted precious metals as legal tender, they are still not recognized as such by federal law.

As a result, investors can rarely use precious metals as currency; they must instead be converted into another asset. Various states also consider precious metals as a commodity and place a sales tax on it.

What About Cryptocurrencies?

This article wouldn’t be complete without at least a brief discussion of cryptocurrency. Like CBDC, cryptocurrencies are entirely digital assets. They are also used as currencies, unlike precious metals.

However, cryptocurrencies are different from CBDCs due to their decentralized nature. Like precious metals, they are not controlled by the federal government. They offer security much more akin to precious metals.

Also, like precious metals, cryptocurrencies like Bitcoin have a built-in value. They have a limited supply and high demand that make them resistant to inflation.

However, cryptocurrencies also have some downsides. Like other digital assets, they are entirely online. Investors must have internet access to reach their assets.

Similarly, investors may be uncomfortable with the intangible nature of cryptocurrencies. Online wallets like Coinbase are also potential targets for cybercriminals.

Finding the Best Investment

Currently, the United States still doesn’t have any CBDCs to invest in. Its theoretical advantages cannot help American investors at present.

Sound money is a much more realistic investment choice to diversify your portfolio. Investing in precious metals is a good way to hedge against inflation and receive tangible assets. Cryptocurrencies may also be worthwhile investments if you are interested in digital assets.