A recent post by the European Central Bank confirms that the ECB is officially launching the project of a digital euro, a European version of “central bank digital cash” (CBDC).
To justify the development of such a currency, we have to consider the general characteristics of money. One important characteristic of money is that money should be considered as a public good which means that the use of money by one person does not reduce its use for others and nobody should be excluded from its use. Therefore, its issuing should not be exclusively done by private issuers and CBDC will be needed to assure that a digital currency will be available to everybody, will circulate freely and will have relatively stable purchasing power. These three conditions are needed for a well-functioning exchange system, hence for a well-functioning economy in general.
At the same time, CBDC is different from privately issued cryptocurrencies or stablecoins.
According to the Bank for International Settlements, a CBDC will be a direct claim on a central bank either limited to be used by commercial banks (wholesale CBDCs) or by everybody (retail CBDCs). This last option is discussed by the ECB. Then, CBDCs will fulfil the three standard roles to be considered as money: CBDCs will be a store of value, a unit of account and a medium of exchange, as they will be digital versions of national currencies.
Cryptocurrencies issued by private issuers do not fulfil the functions of medium of exchange and of unit of account due to their high volatility on exchange markets. They should be considered as highly speculative assets and not as currencies.
Stablecoins, also issued by private issuers, are backed by real currencies but their use still presents default, market, and exchange risks.
Hence, the introduction of a digital euro, according to the ECB, should guarantee that the euro zone will have digital cash that can be considered as a public good without liquidity, credit and market risks.
But, according to Brunnermeier, major challenges need to be mastered.
As cash is the most anonymous type of money, a major challenge will be how to maintain this anonymity and the privacy of CBDC users, because CBDCs should be considered as complements to cash and not substitutes for cash. This immediately raises the question of what technologies central banks should use to develop their CBDC.
Retail CBDC allows citizens to have accounts at the central bank, which will have an impact on the organisation of national financial systems and, as a logical consequence, on the international financial system as we can expect that different CBDCs will be used for cross-border transactions.
The introduction of CBDC will be a challenging task for every central bank and in two years’ time we will see what the ECB’s proposal for the euro zone will be.
Carlo Klein is a faculty member at the Miami University Dolibois European Center, teacher at Lycée Hubert Clément in Esch-Alzette and a board member of Investas ASBL.