A Financial Paradigm: A US Debt Default and the Catalyst for Further Global CBDC Adoption

The possibility of the United States defaulting on its debt has raised concerns worldwide. With the US debt ceiling at a staggering $31 trillion and the looming threat of default on June 1st, the potential consequences extend far beyond American borders. We all have experienced financial instability at some point in our lives, albeit locally or internationally.

Many of us want to forget the 2008 world economic crash, also known as the ‘Global Financial Crisis’, which severely down-turned the global economy, and let’s not forget, originated in the United States. Triggered by the collapse of the housing market bubble, and largely in part because many agencies fell asleep at the wheel, mired by concealment and greed, which led to a widespread financial crisis and had significant implications worldwide.

The potential and or impending global chaos that could arise from a US debt default could serve as a catalyst, and the inevitable, widespread adoption of Central Bank Digital Currencies (CBDCs) and the possible unwelcome realisation of a cashless global society.

Few likely paid much attention when, on March 9th, President Biden signed an executive order directing the government to begin developing a ‘Central Bank Digital Currency’ (CBDC) to be issued by the Federal Reserve, alongside a framework to regulate private cryptocurrencies. But with their debt ceiling at critical standpoint, and under threat by the Republican party’s stubbornness, this is a time which close attention is very much due.

Why is the administration currently advocating for expedited progress in development? The reason primarily relates to foreign policy. The executive order explicitly acknowledges that the United States benefits significantly from the dominant role of the US dollar, financial institutions, and markets in the global financial system. Therefore, it has a vested interest in ensuring that it maintains a leading position in the responsible development and design of digital assets.

In other words, the order aims to strengthen US leadership in the global financial system and protect the long-term effectiveness of essential national security tools, such as sanctions and anti-money laundering frameworks, as expressed by Brian Deese, the former Global Head of Sustainable Investing at BlackRock and current director of the National Economic Council.

So let’s look further at the consequences. We can’t ignore the fact that there would be financial market turmoil and currency shifts. Already some financial institutions are placing restrictions on the availability to liquidate foreign currency of considerable value by their customers.

A US debt default would trigger significant financial market instability globally. Investor confidence in the US dollar would waver, leading to a search for alternative currencies or assets. The resulting uncertainty and volatility could accelerate the adoption of CBDCs as governments seek to establish more stable and secure digital currencies to safeguard their economies.

But lets’ stop celebrate just yet, CBDCs as a ‘Solution for Financial Stability’, comes with mitigating circumstances, controls, and a dystopia warning. Some may say that a central bank issued digital dollar could enable a dark future.

While CBDCs may offer benefits such as convenience and efficiency, they also pose significant threats to individual privacy, personal freedom, and economic stability. There are critics who suggest that a CBDC could enable increased government surveillance and control over financial transactions, eroding privacy rights and potentially leading to a dystopian future.

There are also raised concerns about the potential for abuse of power, as a CBDC could provide governments with unprecedented control over individuals’ financial lives and the ability to monitor and manipulate transactions. It warns against the dangers of a cashless society, where all transactions are tracked and controlled by the government.

Furthermore, the potential for financial instability and disruption that could arise from a CBDC. Critics have argued that a centralised digital currency could undermine the stability of the banking system, increase the risk of cyber-attacks, and lead to widespread financial chaos in the event of a technological failure or malicious interference.

But before you throw in the towel, and draft placards in readiness for protest, there is light at the end of the tunnel. The US debt default could prompt governments worldwide to explore the benefits of CBDCs, such as increased control over monetary policy, enhanced financial security, and reduced reliance on traditional banking systems. Governments would realise that transitioning to digital currencies can help mitigate risks associated with physical cash, improve economic stability, and provide tools for more effective financial management.

However, if the lessons of the Pandemic and recent COP conferences, have taught us anything, the idea of global collaboration and standardisation efforts is not always forthcoming and smooth in transition. In an ideal scenario, the US debt default would likely trigger collaborative efforts among nations to develop and standardise CBDC frameworks.

Sweden’s proactive approach for instance, in adopting a central bank digital currency (CBDC) has positioned it as a global leader in the cashless revolution. Having gone live with their digital currency in March, the Swedish government has set an example of how a CBDC can replace traditional cash transactions entirely. This cashless society, with its emphasis on digital transactions, could provide convenience, efficiency, and financial inclusion for the average citizen.

Recognising the importance of interoperability, governments and international organizations would need to work together to establish protocols and guidelines for CBDC adoption, fostering trust and facilitating seamless transactions across borders. This concerted effort would accelerate the transition toward a cashless global society.

But how far are we all in preparedness for this global transition? According to an article by Digital Information World;  “The Countries Most and Least Prepared for the Cashless Economies of the Future” , an analysis has been conducted to determine which countries are well-prepared for the transition to cashless economies and which ones are lagging behind.

The analysis took into account several factors, including digital payment infrastructure, financial inclusion, digital literacy, and government policies supporting cashless transactions.

The countries that ranked highest in terms of preparedness for cashless economies included Sweden; naturally,  Norway, Finland, Denmark, and Singapore. These countries have advanced digital payment systems, high levels of financial inclusion, widespread adoption of digital technologies, and supportive government policies. They have successfully embraced digital currencies and are leading the way in transitioning towards cashless societies.

On the other hand, the countries that ranked lowest in preparedness for cashless economies include many developing nations, where digital payment infrastructure is limited, financial inclusion is low, and digital literacy rates are comparatively lower. And it’s these countries that face challenges such as inadequate internet access, limited technological infrastructure, and a lack of supportive policies and regulations.

The importance of bridging the digital divide and addressing the barriers to cashless adoption in less prepared countries is paramount. It suggests that improving digital payment infrastructure, promoting financial inclusion, enhancing digital literacy, and implementing supportive government policies are crucial steps for these countries to catch up with the leaders in the cashless economy.

Whilst there are varying degrees of preparedness among countries for the transition to cashless economies. With some favourable nations having made significant inroads and progress and are well-positioned to embrace cashless transactions, others face challenges that need to be addressed to ensure a smooth and inclusive transition.

But it’s certainly not all doom and gloom for the rest of the world. Through the adoption of CBDCs on a global scale would have a profound impact on the average citizen by promoting financial inclusion and accessibility. Digital currencies can offer banking services to the unbanked and under-banked populations, providing them with secure and convenient access to financial services. The elimination of physical cash would reduce barriers to financial participation, empowering individuals to engage in economic activities more freely.

However, there are concerns and criticisms, as governments embark on the journey toward CBDC adoption, it becomes crucial to address privacy concerns and implement robust digital security measures. Striking the right balance between privacy and transparency would be essential to ensure the trust of individuals and businesses in the cashless ecosystem. Governments must prioritise the protection of personal data and develop stringent security protocols to maintain the integrity of CBDC transactions.

Ultimately, time will tell, and while a US debt default could potentially lead to global chaos, it could also serve as a catalyst for the accelerated adoption of CBDCs and the realisation of a cashless global society. As highlighted earlier, with key governments acting as the driving force for immediate action during the wake of the 2019 pandemic. So too, must these governments lead the way, and highlight the benefits of CBDCs in promoting financial stability, enhancing financial inclusion, and streamlining cross-border transactions. It might feel like the average global citizen has no choice in the matter, much like the imposition of choice regarding vaccinations.

But collaborative efforts and standardisation initiatives would drive the transition toward a cashless future, and the possibilities of paving the way towards a much needed ‘Post-Growth’ economic model, and the viability of ‘Universal Income’. However, it is still crucial to address privacy concerns and priorities of digital security, the fundamental overhaul of Data Regulation; i.e. EU’s GDPR and California’s CCPA, to ensure the trust and confidence of individuals in this new financial paradigm.