Only a few years ago, central bank digital currency (CBDC) was seen as something exotic. Sweden’s Riksbank was alone among high-income countries in exploring it, a fact attributed to its population’s uniquely low use of cash.
Now official e-currencies have gone mainstream. Every major player is looking into it: Kristalina Georgieva, IMF managing director, said last week that “after a long period of development, the field is on the cusp of major changes”. China is trialling a digital renminbi, Sweden has completed a technical pilot, and Bahamas has just introduced the world’s first CBDC.
Previously hesitant, the eurozone has moved up to the front. Last week the European Central Bank published the responses to a completed public consultation, itself the follow-up to a concept paper its task force published in October. Fabio Panetta, a member of its executive board, attended a hearing in the European Parliament. This puts the ECB a step ahead of its major counterparts in engaging the public. The UK government launched a “britcoin” task force on Monday and the Bank of England has invited comments on a recent discussion paper. The Federal Reserve is looking into CBDC technology even though it is yet to consult the public.
There is no mistaking the seriousness with which all central banks are now examining whether to provide a digital equivalent to official cash. Silvana Tenreyro, member of the BoE’s Monetary Policy Committee, has pointed out that the pandemic-driven shift to online shopping “adds a lot to the cost of cash use”. The demand for digital payments seems only set to rise. At the same time, central banks are wary of going beyond what the public and political leaders are ready for.
The ECB’s public engagement displays the contradictory considerations they have to navigate. One is a trade-off between privacy and functionality. China’s surveillance state may welcome the look into people’s finances a digital renminbi would provide, but the ECB finds that privacy is people’s highest priority for a digital euro. Yet it is also out of the question to undermine European rules on money laundering and corruption. Complete anonymity is not on the table.
Another set of complications involves an e-currency’s use by non-residents. “The EU has the ambition to have a much more widely used euro outside the eurozone,” said Maria Demertzis, deputy director of the Bruegel think-tank. “The fear” — overdone in her view — is that China’s digitisation is designed to make its currency more attractive.
Rich countries’ central banks have been keen to emphasise that their digital currency projects are collaborative, not competitive. Yet nobody wants to see their own currency be supplanted by private currencies beyond their control, let alone by other central banks. In the hearing, parliamentarians grilled Panetta how an e-euro would interact with non-eurozone economies, how it could make the euro more attractive internationally and whether it would be made available to residents of Northern Ireland.
Behind the talk of co-operation, there also lurks possible industrial policy advantages. The UK task force is charged with “monitor[ing] international CBDC developments to ensure the UK remains at the forefront of global innovation”. To judge from the ECB consultation, a particularly desirable innovation a digital euro could facilitate is “programmability” — built-in capacity for automated transactions and “smart” contracts.
Then there is the worry that CBDC could undermine commercial banks. If everyone were to have digital euros on deposit with the ECB, Demertzis said, “you would be taking out a very big segment of the banking sector”.
On all these dimensions, the EU is an outlier. It flaunts high-flying ambitions for digital privacy and its currency’s global reach, and depends more on banks than other economies. If the ECB has invited the public to contemplate CBDC sooner than other major central banks, it may reflect that it has a longer uphill struggle to rally support for it.