From the mid to late 2010s, and into the early 2020s, there was a flourishing of interest in the idea of central bank digital currencies (CBDCs). By some counts more than 120 central banks have explored the idea of issuing a digital version of their currency. Unlike a typical cryptocurrency, a CBDC would be issued by a state.
…appeared to be aimed at creating sufficient Fear, Uncertainty and Doubt to completely scupper Facebook’s Libra crypto project, and most of which appeared to be quietly sidelined the moment it became clear that they had thoroughly done that job.
Notably though, whilst many of these projects have fallen by the wayside the European Central Bank still seems keen on the notion of a Digital Euro. And the Bank of England, for what it is worth, continues to explore the idea of a Digital Pound (possibly simply because the opportunity to name it Britcoin is too good to pass up).
The United States, under President Trump, has taken a different path. An executive order last February effectively banned the Federal Reserve from issuing its own CBDC and the administration has, as this column covered last summer, pushed ahead with creating a friendly regulatory climate for stablecoins.
Calls for the ECB to press ahead with a Digital Euro have been increasing in recent weeks – for example, a recent open letter to the European Parliament signed by 70 economists.
Interestingly, the arguments made in favour of a Digital Euro are mostly rather less rooted in traditional finance and economics. The case for CBDCs has traditionally been rooted in arguments around efficiency – the notion that a CBDC would allow for instantaneous real time money transfers which cut both cut-out intermediaries and allow for lower cost transactions.
Experiencing American retail banking often comes as a surprise to European visitors. The United States has a cutting-edge technology sector and is a clear global leader in finance and yet the level of service provided (and often the costs involved) in retail banking can appear decades behind what would be expected across the Atlantic. It is notable that many hot US FinTech start-ups sometimes seem to be offering products which have been a standard part of European banking for a long time. In other words, while there may be a decent case that a CBDC, or stablecoins, have a lot to offer customers in the United States, it is harder to see what they offer most Europeans that they do not already have access to.
The case being made for a Digital Euro nowadays is far more based around geopolitics and sovereign capabilities. As that open letter to the European Parliament put it:
Today, Europe’s payment system is dominated by a handful of non-European corporations. In thirteen euro-area countries, basic retail payments now rely entirely on international card schemes – without any domestic alternative. This dependence on foreign (US) payment providers exposes European citizens, businesses and governments to geopolitical leverage, foreign commercial interests, and systemic risks beyond Europe’s control. Recent developments have made this more than a hypothetical risk. Without a meaningful digital euro, our dependence will deepen as US-backed private digital currencies are gaining ground. Europe will lose control over the most fundamental element in our economy: our money.
Of course, not everyone is convinced. Many argue that a CBDC would also come with a loss of privacy and there are others who argue that if Europe wants to reduce its reliance on Visa and Mastercard then simply building a European card payment infrastructure is an easier step. Equally, others worry about the impact of a CBDC on domestic banking.
Much of the debate too depends on how one sees US dollar stablecoins evolving in the future – something which (as previous polls have noted) is subject to an extremely high degree of uncertainty.
The European Expert Panel this week weighed into the debate with its own views.
The experts answered two related questions. Firstly they were asked whether “without a retail central bank digital currency (CBDC), Europe risks a further loss of control over its monetary system to foreign payment service providers, including US Big Tech platforms and US stablecoin issuers?” Directly addressing the kind of fears raised in the recent letter to the European Parliament.
Weighted by confidence, the panel expressed broad agreement with 22% strongly agreeing and 45% agreeing.
Next, turning their attention away from retail customers and towards wholesale payments architecture, the panel was asked whether “without a credible, modern wholesale settlement solution in central bank money – whether via a wholesale CBDC or equivalent infrastructure – Europe risks a further erosion of payments autonomy?”
Once again there was broad agreement with, again weighted by confidence, 26% of respondents strongly agreeing and 60% agreeing. Interestingly, there was more consensus on the need for a new wholesale settlement solution – which, as the question acknowledged, does not necessarily have to involve a CBDC – than there was for a retail system. As Antonio Fatas of INSEAD argued, “there is no need for retail CBDC. In fact retail CBDC without alternative payment rails will do nothing about sovereignty. What is needed is strong independence in payments.”
Franklin Allen, of Imperial College London, argued that CBDCs offer many advantages and called some of the weaknesses of the current Digital Euro proposal unfortunate while pointing to a recent paper he co-authored on the upsides of monetary innovation. For Luis Garicano, of the LSE, argued that “widespread adoption of dollar stablecoins within Europe would constitute a form of ‘digital dollarization’ with serious macroeconomic implications: it would weaken the ECB’s ability to manage rates in the EZ and it would pose risks for financial stability.”
In the collective view of the panel then, Europe would be well advised to ensure that it possesses a credible and modern wholesale settlement solution for central bank money – and a Digital Euro would be one way to achieve that.
