The European Central Bank (ECB) has published a paper on ‘Central Bank Digital Currencies‚ recently.
In July 2021 the #ECB decided to launch a two-year investigation phase into a #digitaleuro project, starting on 1 October 2021.
The expectation that #CBDCs will eventually be issued reflects the benefits of maintaining #centralbank #money in a world where more and more people and merchants prefer the convenience of electronic #payment. Central bank money is the most basic, liquid & resilient form of #money, & should continue to play its role.
This paper examines concerns that the introduction of a CBDC, if not properly designed, could lead to undesirable #bank disintermediation and crowd out private #payments solutions. If CBDCs are to be successful, #centralbanks need to establish #digitalcurrency as a means of exchange which is sufficiently widely used to achieve the necessary network effects but does not become a significant means of #investment.
Three key success factors of a CBDC will be:
- (i) merchant acceptance;
- (ii) the willingness of intermediaries to distribute it and interact as needed with users;
- (iii) an attractive value proposition for individuals and firms to use it for payments. This also raises the question of a business model for a CBDC, e.g. the incentives for front-end service providers.
Another important dimension in designing a CBDC to be successful without crowding out the private sector is scope. For example, it has been suggested that CBDC should:
- (i) be offered in the form of all major payment instruments, including #cards, #mobilepayments & #desktop access, & be as convenient as existing private solutions;
- (ii) allow anonymous #payments, as #banknotes do, to protect #privacy;
- (iii) allow offline payments;
- (iv) allow instant credit transfers to any #commercialbank account and direct debits;
- (v) be #programmable and allow “#smartcontracts” for advanced uses in industry and commerce;
- (vi) promote #financialinclusion (i.e. be accessible to those without bank accounts, mobile phones or #internet access);
- (vii) be available for international uses, to strengthen the international role of the #currency.
The paper devotes particular attention to functionality for cross-border & #foreignexchange (#FX) payments and how this may affect adoption. Comprehensive international payment functionality would obviously increase the attractiveness of a CBDC and its #financialsystem footprint.
The paper concludes that while there can be little doubt about the merits of CBDC and the need for central banks to follow changes in retail payments habits & #technology to continue serving individuals and firms, many questions about the design of a CBDC still need to be addressed. These include the functional scope, business model and controls required to meet demands and ensure robust use. Any CBDC project has also to be kept realistic, manageable & focused.