The European Central Bank (ECB) has taken a significant step towards the launch of a digital euro, following in the footsteps of several countries that have introduced central bank digital currencies (CBDCs). China is currently trialling a prototype yuan with 200 million users, while India is preparing for a pilot program. Additionally, around 130 countries, representing 98% of the global economy, are exploring the concept of digital cash.
The ECB’s move, establishing a pilot that could lead to a digital currency for the 20 countries that use the common euro currency, makes it the first major Western central bank to formally take steps in this direction. If successful, this could serve as a global blueprint for other central banks. Proponents argue that CBDCs will modernize payment systems, introducing new functionalities and providing an alternative to physical cash, which is gradually declining in use.
However, concerns remain over the advantages of CBDCs. For example, Nigeria’s adoption of CBDCs has seen low uptake, and there have been protests against the ECB’s plans, indicating public concerns about privacy. Commercial bankers are worried about the potential costs and the possibility of customers moving their money into central bank accounts, which could lead to deposit bleeds. Developing countries are also concerned that an easily accessible digital dollar, euro, or yuan could disrupt their existing systems.
The ECB’s plan is receiving keen attention from around the world. Josh Lipsky, who runs a global CBDC tracker at the Atlantic Council, describes it as a significant development that is being closely watched by other countries. The ECB, being one of the largest central banks, has the potential to influence the future of CBDCs if it addresses privacy and cybersecurity issues and ensures offline usability.
Central banks were initially prompted to take action five years ago when Facebook announced plans for its own digital currency. However, policymakers have yet to fully convince many people of the necessity of CBDCs. Fabio Panetta, the ECB Executive Board member overseeing the bank’s digital euro work, believes that it will help “future-proof” the currency and reduce dependence on the payment systems of U.S.-based credit cards. Nevertheless, experts remain uncertain about the unique advantages of CBDCs. Lee Braine, managing director of advanced technologies at Barclays, questions what can be achieved with a retail CBDC that cannot be replicated with commercial bank money, cautioning against potentially breaking the singleness of money and creating a two-tier system.
The launch of retail CBDCs by the U.S. Federal Reserve or Bank of Japan remains uncertain. While China and India have substantial populations, India’s more open economy may provide a more effective test environment. Canada and some other countries are taking a cautious approach, while those already using CBDCs are observing minimal interest. Data from the Bahamas, which introduced the world’s first digital currency in 2020, shows declining personal transactions and wallet top-ups. Similarly, Nigeria’s eNaira has seen disappointingly low adoption rates, with 98.5% of wallets never being used.
The International Monetary Fund (IMF) is actively assisting dozens of countries with their CBDC plans and intends to publish a guide on the subject. The IMF is also developing its XC platform to process CBDC transactions. The choices made by the ECB and India, along with the guidance provided by the IMF, could potentially define a global standard for CBDCs, much like VHS did in the early days of the videotape era.
Ultimately, the question that needs to be answered is how CBDCs will improve the financial system. The ECB, along with other central banks and international organizations, is actively exploring this question with the aim of establishing a digital currency that offers tangible benefits.
More detail via Yahoo! Finance here… ( Image via Yahoo! Finance )