How Could a CBDC Affect Precious Metals?

One of the pressing hot button issues of our time is the development and implementation of central bank digital currencies (CBDCs). Just a few years ago, the possibility of CBDCs even being developed seemed slim, as many central banks dismissed cryptocurrencies and digital currencies as passing fads.

But today CBDCs are increasingly being studied by central banks, as China’s push to adopt its own CBDC has spurred interest from Western countries. But as useful as a CBDC could be, it could also have numerous drawbacks.

For Americans who are used to financial privacy and freedom, the existing push to eliminate cash and push transactions to electronic methods is already frustrating. But the push for an American CBDC, an e-dollar, seems like it’s just a step too far.

How would you protect your financial privacy if a CBDC were to gain a foothold in this country? And would traditional means of safeguarding wealth, like owning precious metals, even be possible in a post-CBDC world?

What Is a CBDC?

A central bank digital currency is a cryptocurrency-like digital currency issued by a central bank that is intended to circulate as a medium of exchange and either augment or supplant existing central bank-issued or government-issued currency.

The US Federal Reserve System already operates mostly digitally anyway, as the trillions of dollars it creates to purchase assets aren’t actually paper dollar bills printed on a printing press. They’re 1s and 0s created electronically and transferred from a Federal Reserve account to a financial institution’s account.

While these digitally created dollars may eventually find their way into the overall financial system, and may eventually end up in an end user’s bank account, they aren’t really intended to replace bank deposits or paper money.

A CBDC, on the other hand, could conceivably replace paper money, bank deposits, checks, or even free market cryptocurrencies like Bitcoin. But as a CBDC is still just an item of study, the devil is in the details.

How Would a CBDC Work?

A CBDC would be issued by a central bank, but aside from that the method of operation could take a number of different forms. Right now China is kind of setting the road map for CBDC operation, so let’s look at how their e-CNY works.

Essentially the e-CNY operates as a direct liability of the central bank. The central bank issues the currency and accepts it. Anyone with a mobile phone number can open a digital wallet that can then hold the CBDC.

One fear of CBDCs is that they might force banks out of business. But in China, the central bank works with multiple large banks that actually issue and service the digital wallets. Central banks don’t have the expertise or manpower to work directly with consumers, nor do they want to put banks out of business.

While the e-CNY is supposed to retain some sort of anonymity, so that a user of the CBDC won’t necessarily be known to a seller who accepts the CBDC, there is no anonymity when it comes to the government. So every transaction can be seen and tracked by the government, including knowing who used how much CBDC, how much was paid, and what was purchased.

Do Other Countries Use CBDCs?

Aside from China, a handful of other countries also use CBDCs. Nigeria is one of them, with the government there having taken the draconian step of limiting the amount of money that people could withdraw from ATMs in order to try to force acceptance of the CBDC.

The Eastern Caribbean Central Bank has also issued its D-Cash CBDC, although it has had its hiccups. But aside from these limited examples, most other central banks are still in the discussion phase, trying to determine what the potential use cases are for a CBDC and what the benefits might be.

CBDCs and Privacy Concerns

For consumers, privacy concerns are one of the primary potential drawbacks to any CBDC. The fact that the government could track every single transaction is frightening to anyone who values individual liberty.

But governments see that aspect of CBDCs as a positive. Former Mexican central bank chief Agustin Carstens summed it up in a speech in 2021, in which he explained how CBDCs could allow central banks absolute control over money.

Today, if you use a $20 bill to buy food at the store, no one can trace that transaction to you. If you use a credit card, or Apple Pay, or some other form of electronic payment, there may be an electronic record that is tied to you that the seller or payment processors keep, largely for marketing purposes.

But if the government wanted to find out what you bought, it would have to convince a judge to issue a warrant, and would have to have some suspicion of wrongdoing. With a CBDC, however, that transaction would be recorded by the government.

Naturally governments try to downplay these privacy concerns, by claiming that CBDCs can crack down on tax evasion, money laundering, and other illegal activity. And if you haven’t done anything wrong, what do you have to hide?

But while people willingly give up a little bit of anonymity when using payment methods like Paypal, Zelle, or credit cards online, we still expect records of those transactions to be free from government snooping. And we choose to use those payment methods, we’re not forced into them.

The fear with CBDCs is that they’ll be used to replace cash, and that people will be coerced into using the CBDC so that the government can track more and more transactions, collect more taxes, or even crack down on purchases that it doesn’t like. It’s the potential for misuses of CBDCs by governments that has so many people up in arms against CBDCs.

CBDCs and Gold

If cash is replaced by CBDCs, how can you maintain anonymity when making purchases? That’s an important question, especially as CBDCs may very well also replace Bitcoin and other cryptocurrencies as methods of payment. Could it be that gold, silver, and other precious metals become the money of last resort for those who value their financial privacy?

It’s hard to say what would happen. It all depends on how a potential US dollar CBDC is introduced, and what kind of action is taken against cash, Bitcoin, and other potential competitors.

When the US government first introduced United States Notes and National Bank Notes in the 1860s, it taxed state bank notes out of existence in order to stifle competition. Then when Federal Reserve Notes were introduced after the creation of the Federal Reserve System, National Bank Notes not backed by US bonds were subject to punitive taxation.

Would cash today face similar treatment? Maybe not in the form of outright taxation, but could there be restrictions on its use? Or how about other CBDC competitors like Bitcoin and other cryptocurrencies?

What are the odds that the federal government would spend several years and billions of dollars developing and creating a CBDC, only to let it fail when consumers are allowed to spurn it? That doesn’t seem likely.

It’s because of concerns like this that fear of CBDCs is growing. People want choice, particularly when it comes to their money. They don’t want to be forced to use money or methods of payment that they don’t want, and they’re worried that the introduction of a CBDC might bring with it an element of coercion.

We’re only a few years removed from COVID hysteria, lockdowns, and vaccination mandates. And given the fact that China, with its social credit system, is the forerunner in the CBDC sphere is helping to drive fears that CBDCs will bring with them some sort of government coercion.

So how to protect yourself?

One way that people are starting to protect themselves is by buying gold and silver. Gold and silver are physical assets with a long history as monetary metals. And as cash dies out, precious metals like gold and silver may be the only tangible forms of money that remain.

Looking at China, gold demand from Chinese investors remains strong, even as the government introduced a CBDC and cracked down on other cryptocurrencies. There’s no reason to believe that things might not be the same in the US if a CBDC were ever to be introduced here.

Gold has served as a safe haven asset and store of value for centuries. Unlike paper currencies and centrally issued digital currencies, it can’t be printed ad infinitum or created ex nihilo. That helps guarantee a relatively stable supply, which helps support gold prices.

With so much uncertainty surrounding the potential creation and adoption of a US CBDC, many people are taking steps ahead of time to protect themselves by buying gold and silver. They want to own tangible physical assets that can serve as stores of wealth and that won’t have the government looking over your shoulder all the time.

Goldco offers gold and silver products from mints around the world, and with over $2 billion in precious metals placements and over 5,000 5-star reviews, we work hard to provide quality products and exceptional customer service. If you’re worried about CBDCs and want to buy gold and silver to protect yourself, call Goldco today to learn more about your gold buying options.