Just a few years ago, the central bank’s digital currency (CBDC) was seen as something exotic. Sweden’s Riksbank was alone among the high-income countries in the survey, a fact attributed uniquely to the low cash use of its population.
Now official e-currencies have become commonplace. All the major players are investigating it: Kristalina Georgieva, the director of the IMF, said last week that “after a long period of development, the field is one step closer to big changes”. China is testing digital renminbi, Sweden has completed a technical pilot, and the Bahamas has just unveiled the world’s first CBDC.
Earlier hesitating, the eurozone has moved forward. Last week, the European Central Bank published its answers to the completed public debate, which is a continuation of the concept announced by its working group in October. Fabio Panetta, a member of the executive board, attended the hearing in the European Parliament. This puts the ECB one step ahead of its main counterparts in engaging the public. The UK government launched a working group on britcoin on Monday, and the Bank of England called for comments on a recent discussion paper. The Federal Reserve is investigating CBDC technology even though it is not yet in public consultation.
One cannot be confused with the seriousness with which all central banks are now examining whether the digital equivalent of official cash should be provided. Silvana Tenreyro, a member of the BoE’s Monetary Policy Committee, noted that the pandemic shift towards online shopping “adds a lot to the cost of cash”. It seems that the demand for digital payments will only grow. At the same time, central banks are cautious about going beyond what public and political leaders are willing to do.
The public engagement of the ECB shows contradictory considerations in which they must move. One is a compromise between privacy and functionality. The Chinese state under supervision can welcome a view of people’s finances that would provide a digital renminbi, but the ECB believes privacy is people’s highest priority for the digital euro. However, undermining European rules on money laundering and corruption is also out of the question. Complete anonymity is not on the table.
Another series of complications includes the use of e-currency by non-residents. “The EU has the ambition to have a euro that is much more used outside the eurozone,” said Maria Demertzis, deputy director of the Bruegel Research Center. The “fear” – exaggerated in her opinion – is that China’s digitalisation is designed to make its currency more attractive.
Central banks of rich countries want to emphasize that their digital currency projects are collaborative, not competitive. Yet no one wants their own currency to be pushed by private currencies beyond their control, let alone other central banks. At the hearing, lawmakers praised Panetta for how the e-euro will communicate with economies outside the eurozone, how it can make the euro more internationally attractive, and whether it will be available to residents of Northern Ireland.
Behind the talks on cooperation, there are also possible advantages of industrial policy. The British working group is in charge of the “monitor[ing] international CBDC development to ensure that the UK remains at the forefront of global innovation. ” Judging by the consultation with the ECB, a particularly desirable innovation that the digital euro could facilitate is “programmability” – built-in capacity for automated transactions and “smart” contracts.
Then there are concerns that the CBDC could undermine commercial banks. If everyone had digital euros on deposit at the ECB, Demertzis said, “you would throw out a very large segment of the banking sector.”
In all these dimensions, the EU is unusual. It boasts high ambitions for digital privacy and the global reach of its currency and is more dependent on banks than other economies. If the ECB has called on the public to consider the CBDC before other major central banks, it could happen that it has a longer difficult struggle to gather support for it.