The digital euro, like many central bank proposals around the world to issue virtual cash, has so far existed in a policy friendly space: maximum imagination, minimum execution. It is easier and cheaper to dream of a token, wallet or ledger that can secure fiat money in the future against the next bitcoin or stablecoin than to actually do it.
However, as the deadline for making a real decision draws closer to pumping out jargon-filled white papers on whether to proceed, legs are shaky in the face as big risks emerge.
A series of bank failures in the US – in which cryptocurrencies played a part – and the collapse of credit Suisse Groupe AG has informed central bankers everywhere of the dangers of tampering with the financial system, where depositors are increasingly fleeing. throw a digital euro in banking systemFor example, can suck up deposits; One study found that even a small amount of €2,000 ($2,180) per household could rob small banks of more than 10% of their deposits.
The risk of public backlash also appears to be growing, coupled with assorted conspiracy theories of Orwellian control, as well as the undeniable truth that an online digital euro will offer less privacy than cash. some surveys [in the West] Suggestion that consumers are unwilling to have personal payment data accessed by central banks.
Then there is the frivolous sense of central banks proposing to fix what isn’t broken at taxpayers’ expense. Cryptocurrency fever has cooled since the pandemic and venture capital funding has more or less dried up without major disruption – suggesting that the current tool-kit of central banks is still sufficient to protect the financial system and perhaps inflation. Fighting should be its real priority. Sweden now says it doesn’t need a central bank digital currency (CBDC), while the UK has abandoned plans for non-fungible tokens issued by the Royal Mint. It looks like this whole CBDC scene is no longer attractive.
If the tech moon of CBDCs is to survive the current crypto winter, it will require a change of approach. He should at least clarify his manifesto.
There are still good reasons to pursue a digital euro in a world where strange and worrisome forms of money are still rolling off the conveyor belt, from stable coins to AI-backed tokens, to the use of cash and potentially volatile take on monetary policy. with effect. The tech world has already got access to a lot of personal data due to the rise of digital transactions. With the likes of WorldCoin plotting to scan the eyes of the planet to create digital currency-backed IDs based on human iris data, CBDCs seem less Orwellian and more a practical way of hiring technical talent and staying in that race. One who can lead anywhere.
The latest proposals from the European Commission seem to be going in the right direction: they point to a form of digital cash that is as narrow as possible, offering payments even without an internet connection and making it legal tender.
But there is still no real answer to the privacy question, except to trust that, like Odysseus, central bankers can stay tied to the mast even as the sirens demand more data access.
Nor is there a real answer to how we can prevent the loosening of commercial banks’ hold on funding or risk models, even as they are prodded to share more data with fintech rivals.
Perhaps the question of what central bankers should do next should be thrown back to politicians and governments. The line between fiscal and monetary policy is inevitably blurring as CBDCs become a reality, according to economist Paul Sheard, former vice president at S&P Global. went.
Central bankers must admit they don’t have all the answers: if moving the physical euro 23 years ago required a grand bargain between French leader Francois Mitterrand and Germany’s Helmut Kohl, perhaps its digital version will do. Also requires less technical touch.
It could also mean years of work to perfect the digital version of the euro, echoing the time it took to perfect its physical predecessor. Given that confidence in central banks is not weak, it would be wise to exercise patience.
At the turn of the millennium, when PayPal Holdings was just getting started, economist Charles Goodhart dismissed the idea of digital monetary disruption: “Central banks may incompetently cause their own destruction,[but]they are the most vulnerable to technological innovation.” per will be relatively immune,” he said. They said: It’s best to walk, not run future of Digital Central Bank Money.
Lionel Laurent is a Bloomberg Opinion columnist covering digital currencies, the European Union and France.
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Updated: 06 July 2023, 11:02 PM IST