The evidence that Central Bank Digital Currencies (CBDCs) could soon replace physical cash, topple crypto, and cause a major reorganization of the global financial system is there for all to see.
Are you looking to diversify your portfolio and get access to potentially profitable opportunities, but not sure where to start? This article explores how to invest in CBDCs, and your options if you want to buy digital currency.
Why invest in CBDCs?
In an ever more cashless world, digital currency is set to become the norm. CBDCs allow you to store and transfer money and make digital payments. But unlike crypto, they are an electronic form of the physical currency.
In fact, today, CBDCs are emerging as a viable alternative to cryptocurrencies and other digital assets. They are more reliable, and not as susceptible to high levels of fluctuation, credit and liquidity risk, and the impacts of financial crisis.
Before going on to discuss both the direct and indirect ways to invest in Central Bank Digital Currencies, let’s first set the scene.
What are CBDCs, and how do they work?
In contrast to crypto, which is not regulated by a single authority, CBDCs are issued by a country’s central bank, and tied to country’s fiat currency. They are the same as the sovereign currency, but in digital form.
They are the liability of a central bank, just like physical currency, and can be used within the banking systems’ digital ledger. CBDCs or fiat currency, use permission-based or authorized blockchains which are private and not public like bitcoin.
Consumers have a digital wallet to use for payments. They are legal tender that can be used in a variety of ways; to buy goods and services, make transfers and cross-border payments, and access financial services.
In theory, CBDC interest rates could mirror existing policy rates, but there is speculation that they could be set to a different level to encourage or discourage demand. Expect to see a mix of interest bearing and non-interest bearing accounts for wholesale and retail transactions.
Digital currency – strong authentication and encryption
One of the main benefits is that transfers are immediate because they happen on a single digital ledger. Another is that Central Bank Digital Currencies are highly secure, with strong authentication and encryption protocols to prevent fraud and identity theft.
There are two main types of central bank digital currency – retail and wholesale. On the consumer side, retail CBDCs are a publicly available option that allows anyone to make digital payments. As with a central bank’s reserve, wholesale CBDCs are held by them, like traditional funds, to help dictate monetary policy – lending and interest rates. Financial institutions are then granted the capacity to make and settle interbank transfers by the central bank.
Preparing for wide-scale CBDC adoption
It’s fair to say that, globally, CBDCs are still in the adoption phase. To date, only a relatively small number of countries have introduced them. That being said, research by fintech & payments experts Juniper estimates that the value of payments made using CBDCs by 2030 will increase from current levels of US$100 million to US$213 billion a year. That’s a staggering 260,000% jump in less than seven years.
Further evidence of the impending wide-scale adoption of Central Bank Digital Currencies was published recently by the U.S.-based Atlantic Council think tank. It found that 98% of the world’s economy, 130 countries, including all G20 countries other than Argentina, are currently exploring their own digital currency.
It’s little wonder that so many governments are planning to adopt CBDCs. With the advantage of taking back control in terms of the continuing move away from physical cash, the incentives for the government include countering illicit money, fraud, money laundering and terrorist financing, as well as challenging the financial power of bitcoin and Big Tech companies.
One potentially negative outcome, depending on your point of view, is that governments would effectively control and monitor all transactions through the central bank ledger, with clear concerns for privacy and individual freedom. On the flip side, CBDCs could prove to be the most secure digital currency for the public.
So, where are we in terms of CBDC adoption?
- Eleven countries have already adopted CBDCs, including The Bahamas, Jamaica, Anguila, Nigeria, and seven Eastern Caribbean Central Bank countries – St. Kitts and Nevis, Antigua and Barbuda, Grenada, Montserrat, Dominica, St. Vincent and the Grenadine, and Saint Lucia.
- In China, 260 million people are now participating in pilot testing. Brazil and India are preparing to launch next year.
- In March 2022, President Biden signed an executive order which included investigation of a CBDC for the United States’ own digital dollar.
- However, while the United States’ progress on a wholesale digital version is ‘moving forward’, the public CBDC has ‘stalled’, according to the Atlantic Council’s research.
- A pilot by The European Central Bank is expected to launch in 2028.
- Russia, Australia, South Korea, and Thailand are pilot testing this year.
- Work is continuing on central bank cross-border projects involving 12 countries.
How can I invest in CBDCs now?
There are both direct and indirect ways to invest in CBDCs. Though opportunities are limited, and we are largely in the adoption phase, smart investors will see the potential. There are likely to be substantial gains for those who act early.
Savvy investors like Warren Buffet, who backed the disruptive Nubank, and multinationals Visa and Microsoft are already participating in the US pilot, with a host of other financial institutions.
How to invest in CBDCs directly
For now, though, let’s start from the ground up and explore direct investment opportunities.
To buy CBDCs in larger quantities, you need to hold the local currency in your account, and be resident in the country of issue. Taking the example of The Bahamas Sand Dollar digital currency, non-residents, and those who are visiting or un-banked, can only hold up to Digital B$500.
Resident individuals have a limit of $8,000, and can benefit from less complicated due diligence. Whereas those with commercial interests and proof of regulated status can hold between $8,000 and $1 million. That’s a substantial figure.
To enroll, you must first get access to an electronic wallet, which is done through an authorized issuing agent, such as SunCash, or IslandPay, for example.
The next step is to select your preferred Sand Dollar authorized financial institution, such as personal or commercial banks. You then choose the relevant wallet option, individual or business, and provide the required KYC information.
Finally, you download the proprietary e-wallet, and that’s it, you’re ready to go, and can transact with anyone with an approved Central Bank e-wallet.
Now that you have a CBDC wallet, you can top it up by transferring funds from your bank accounts, using an ATM, or moving CBDCs from another wallet.
Digital currencies for fast, safe, and secure transactions
Despite the fact that CBDCs are only directly available to those that reside in the country issuing them, these jurisdictions are growing in number. This is an attractive option for those seeking to explore the financial and lifestyle benefits of citizenship in attractive locations like the Caribbean.
Although CBDC’s are not yet an obvious asset choice, like bitcoin, the investment opportunities are likely to evolve. Of course, the benefits of holding digital currency in a country’s federal reserve bank or other financial institution include asset diversification, fast, safe, and secure transactions, and access to a better range of financial services.
How to gain from CBDCs indirectly
There are three principal ways to get involved in what has been called the ‘war on cash’ on an indirect basis. These opportunities can be accessed by investing in;
- CBDC technology development companies.
- Companies putting CBDCs to use.
- Funds that track CBDCs.
CBDC technology companies
The underlying tech used to facilitate CBDCs are blockchains and distributed ledgers. And while the use of these tools for CBDCs is still in the development phase, because the blockchains used are private and permission based, the space is almost certain to grow.
Expect to see new players in blockchain development that will provide new payment and digital asset management solutions for the governments and institutions embracing CBDCs and fiat currency.
In Hong Kong, for example, a company called Ripple is currently developing a platform built on a private ledger to allow central banks to issue digital currency.
Companies that use Central Bank Digital Currencies
With CBDCs set to become widely available, it could pay to invest in the companies that will utilize them. These will include fintechs and those involved in digital payments and gateways, mobile payments, cross-border payments and the infrastructure needed to adapt the financial system.
As traditional banking is further eroded by the uptake in digital currency, investing in companies that will play a significant role in the transformation could prove to be profitable. It’s one way to get indirect exposure the benefits of CBDC adoption.
We might still be in the ‘wait and see’ phase, but shrewd investors are those that monitor the key trends and know when to take action.
Funds that track Central Bank Digital Currency
In terms of the funds, such as Exchange Traded Funds (EFT) that invest in CBDCs, we know that many funds already have a focus on crypto. And while CBDCs are still on the launch pad, it will be no surprise to see those funds expand into the broader digital currency space.
There are a large number of established crypto funds in existence that track the price of digital tokens. There are also well established EFTs that provide investors with exposure to foreign exchange and currency markets.
There is no reason to believe that Central Bank Digital Currency won’t follow suit and provide opportunities around digital currency tracking and speculation. It is a ‘watch this space’, but the early bird gets the worm, as the old saying goes.
Investing in the future of CBDCs
So there we have it, it’s clear that the path to invest in CBDCs is very much open for individuals and companies that are based in countries with digital currency issued. For those that are not, it could be yet another advantage of acquiring a secondary residency, or incorporating in another jurisdiction.
From the perspective of the transformative change that CBDCs will bring, there is likely to be significant profit in investing in the future of Central Bank Digital Currencies for those that research the market.
The advantages of CBDCs for people and governments
If you still need convincing, let’s recap the advantages of digital currencies.
By allowing direct interaction between a nation’s central bank and individuals, CBDCs make transactions straightforward because there are no intermediary financial institutions. When sending money across borders for international settlements, Central Bank Digital Currency is quicker, cheaper, and safer, with instantaneous transactions, minimal fees, and secure, private blockchains.
By removing the need for physical money, CBDCs can be beneficial for financial inclusion, those with limited access to banking facilities, or where traditional infrastructure is minimal.
With strong security features and better transparency, one of the major benefits of CBDCs is in their ability to thwart financial crime, fraud, and illegal activity in general. This is certainly a central aspect of their adoption by governments.
By being tied to the sovereign currency, and backed by central banks, CBDCs are not susceptible to the volatility spikes and troughs associated with crypto. If Central Bank Digital Currency adoption is wide, as predicted, it could allow central banks to have a greater impact on monetary and fiscal policy by giving their federal reserve more control of money supply and thus inflation.
The real and potential negatives of digital currencies
As clear as the benefits of CBDCs appear, there are some potential negatives. For one, the program is in its infancy, and adopters are few. This means that access to CBDCs is, so far, limited. In certain countries like Ecuador, for example, which ran a pilot, take-up was so low the central bank eventually canceled it. It’s not a given, therefore, that people will rush to adopt, despite the ongoing pressure to free us from physical currency.
Others have voiced concerns over cyber attacks, and other online risks that may be inherent in a digital-only financial world. Even with security and transparency features, there is still the possibility that new methods of criminal behavior will evolve to undermine a CBDC.
A lot of this depends on how good a job counties make of setting up a domestic payments system with the technical and legal structures needed to handle digital currency. Not to mention being able to afford what could be costly changes from their federal reserve.
Last, and by no means least, the cost to privacy and personal freedoms in a cashless scenario, and the erosion of the right to use cash, is a major concern for many.
For now, the adoption of CBDCs is limited, but we know that the majority of the world’s major economies, are piloting this fast emerging digital currency.
In those jurisdictions that already have a Central Bank Digital Currency in place, it is absolutely possible to enjoy the benefits. The bigger picture is the investment opportunities that will emerge as global citizens, governments, and banking systems embrace a cashless future, where digital currencies are the new normal.
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