The European Central Bank (ECB) has taken a significant step toward the introduction of a digital euro, signaling the beginning of a critical phase in the evolution of digital currencies. Several countries have already introduced central bank digital currencies (CBDCs), with China testing a prototype digital yuan with over 200 million users and India preparing for a pilot program. Approximately 130 countries, representing 98% of the global economy, are exploring digital currencies, reflecting a widespread acknowledgment of the transformative potential of this technology.
The ECB’s recent move to establish a pilot program that could lead to the creation of a digital euro for the 20 countries that share the common currency represents a milestone in the digital currency landscape. This development positions the ECB as the first heavyweight Western central bank to take concrete steps in the CBDC direction, setting a potential global precedent for others to follow.
Proponents of CBDCs argue that these digital currencies will modernize payment systems by introducing new functionalities and providing an alternative to physical cash, which is experiencing a decline. However, there are lingering questions about the true advantages of CBDCs, with adoption rates remaining low in countries like Nigeria, which has embraced them. Additionally, there have been public protests against the ECB’s plans, highlighting concerns about privacy and government surveillance.
Commercial banks are apprehensive about the costs and potential loss of deposits as customers may move their funds into central bank accounts. Developing countries are concerned that easily accessible digital currencies such as the digital dollar, euro, or yuan could disrupt their financial systems.
The ECB’s plan has garnered significant attention from the global community. Josh Lipsky, who oversees a global CBDC tracker at the Atlantic Council, emphasized the importance of the ECB’s actions, stating, “It is one of the biggest central banks, so if it comes up with answers to the privacy and cybersecurity issues and the ability to use it offline, it will be very influential.”
Central banks worldwide took action following Facebook’s announcement five years ago about its plans to launch a separate currency. Policymakers, however, have yet to fully convince many of the necessity of CBDCs. While the ECB’s Fabio Panetta argued that a digital euro would “future-proof” the currency and reduce reliance on U.S.-based credit card payment systems, there are still questions about the unique advantages of retail CBDCs compared to commercial bank money.
Experts are struggling to pinpoint the distinct capabilities of a retail CBDC that cannot be replicated using traditional commercial bank money. The risk of creating a two-tier system, where CBDCs have different functionalities or data disclosure rules than bank accounts, has also been raised. The fundamental question in this context is, “What is money?”
The introduction of retail CBDCs by the U.S. Federal Reserve or the Bank of Japan remains uncertain. India could serve as an effective testing ground for CBDCs due to its relatively open economy. In contrast, Canada and some other countries appear to be proceeding cautiously, and those that have already adopted CBDCs are observing limited public interest.
The Bahamas, which launched the world’s first digital currency in 2020, reported an 11% decline in personal transactions for its SandDollar in the first seven months of the year, with wallet top-ups decreasing significantly. Nigeria’s eNaira adoption has been “disappointingly low,” with 98.5% of wallets going unused.
The International Monetary Fund (IMF) is actively assisting dozens of countries with their CBDC plans and is working on an XC platform designed to process or “settle” CBDC transactions. The IMF is set to publish a how-to guide to help countries navigate the CBDC landscape.
The choices made by the ECB and India, along with the development of technologies, could help define a global standard for CBDCs, similar to VHS’s impact during the early days of the videotape era. The overarching question surrounding the development of CBDCs remains focused on how they can improve the financial system.