The European Central Bank is planning ... a "digital euro"? Say what?
The European Central Bank is planning ... a "digital euro"? Say what?
I've been reading lately about the European Central Bank's (ECB) plans to issue a new digital euro currency soon. That would be a cryptocurrency without the “crypto.” Also called a “central bank digital currency” (CBDC).
ECB short definition1:
I still haven't seen anything explaining, you know, why they are doing it. Articles like this one from Politico EU last February haven’t been very enlightening, “The euro’s biggest shakeup — and why central bankers want you on board.”2 Even a wonkier analysis like a 2022 one from Vox EU CEPR comes off pretty foggy.3
So I just looked at the ECB's own FAQ page on it.4 And I still can't tell why.
The only practical value of private digital cryptocurrencies like Bitcoin - besides pure pump-and-dump financial speculation - is if you want to do black market transactions. Presumably the ECB doesn't want to do that. Unless maybe it's anticipating using that to avoid American sanctions or something.
Investors have always been able to speculate on the value of the euro by moving money into and out of the currency depending on what they expect future exchange rates to be. They don’t need a “digital euro” to do that.
I'm no currency expert. But this doesn't make sense to me. I've never seen how digital currency offers any advantage over electronic bank and credit cards or regular physical currency. Except for the black-market thing.
Because when a central bank creates money, it is already does it electronically. If the ECB wants to add another billion euros to the money supply, it does it by making digital entries on its account and allocates it digitally to other financial institutions. It doesn't literally print up a billion euros in paper bills.
This FAQ page from the US Federal Reserve basically says just that:
1. What is a central bank digital currency (CBDC)?
A CBDC is a digital form of central bank money that is widely available to the general public."Central bank money" refers to money that is a liability of the central bank. In the United States, there are currently two types of central bank money: physical currency issued by the Federal Reserve and digital balances held by commercial banks at the Federal Reserve.
While Americans have long held money predominantly in digital form—for example in bank accounts, payment apps or through online transactions—a CBDC would differ from existing digital money available to the general public because a CBDC would be a liability of the Federal Reserve, not of a commercial bank.5 [my emphasis]
In other words, something that only auditors would even notice in practice.
The Fed’s FAQ states, “The Federal Reserve has made no decision on issuing a central bank digital currency (CBDC).“ It doesn’t explain why there might be a decision to make.
The ECB FAQ page provides some reason to wonder if a digital euro would provide a way to pay private banks to do something that the ECB itself can probably do more cheaply. For instance:
A digital euro should not have negative consequences for the financial sector. To do this, we will take into account the following requirements: i) a digital euro should be mainly used as a means of payment and not become an instrument for financial investments, and ii) supervised intermediaries should be involved in the handling of a digital euro. …
A digital euro requires a certain infrastructure on the part of central banks and the supervised intermediaries involved. …
A digital euro scheme is considered to be the best option for achieving the objectives of a digital euro and harnessing the respective strengths of the public and private sectors. The digital euro scheme will lay out the common rules and procedures for the distribution of the digital euro by supervised intermediaries, ensuring consistent accessibility and user experience across the euro area. It will also allow sufficient flexibility for the private sector to innovate and offer value-added services on top of digital euro services. [my emphasis]
Then there is this head-scratcher:
Q6. Will a digital euro be based on a distributed ledger technology (DLT) such as Blockchain?
The Eurosystem is experimenting with different approaches and technologies to making a digital euro available. This includes both centralised and decentralised solutions such as DLT. No decision has been taken yet, however. [my emphasis]
They are considered using Blockchain?
The Blockchain technology has been one of the biggest problems with previous cryptocurrencies like Bitcoin. Blockchain digital currency particularly energy-intensive. Far more so than normal electronic financial transactions.
This will be an interesting project to follow if the ECB goes forward with this.
Ditital euro. European Central Bank, 2023. <https://www.ecb.europa.eu/paym/digital_euro/html/index.en.html> (Accessed: 2023-08-07).
The euro’s biggest shakeup — and why central bankers want you on board. Politico EU 02/20/2023. <https://www.politico.eu/article/euro-shakeup-european-central-bank-digital-currency/> (Accessed: 2023-07-07).
Panetta, Fabio et al (2022). Monetary policy and financial stability implications of central bank digital currencies. Vox EU CEPR 04/13/2022. <https://cepr.org/voxeu/columns/monetary-policy-and-financial-stability-implications-central-bank-digital-currencies> (Accessed: 2023-07-07).
FAQ on a digital euro. European Central Bank, 2023. <https://www.ecb.europa.eu/paym/digital_euro/faqs/html/ecb.faq_digital_euro.en.html> (Accessed: 2023-07-07).
Central Bank Digital Currency (CBDC)-Frequently Asked Questions. Board of Governors of the Federal Reserve System. 04/11/2023. <https://www.federalreserve.gov/cbdc-faqs.htm> (Accessed: 2023-07-07).