The digital euro, like a lot of central bank proposals to issue virtual cash, has so far existed in a policy sweet spot: maximum imagination, minimal execution. Dreaming up tokens, wallets, or ledgers that may future-proof fiat against the next Bitcoin or stablecoin is easier and cheaper than doing it for real.
As deadlines loom for a shift from pumping out jargon-filled white papers into an actual decision on whether to go ahead, however, feet are shuffling awkwardly as big risks hover into view.
A string of bank failures in the US — in which cryptocurrency played a part — and the downfall of Credit Suisse Group AG have attuned central bankers to the dangers of tinkering with a financial system where depositors are increasingly flighty. Throwing a digital euro into the banking system, for example, could suck deposits away; one study found that even a small take-up of €2,000 ($2,180) per household could rob smaller banks of more than 10% of their deposits.
The risk of a public backlash is also rising, fed both by conspiracy theories of Orwellian control and also the undeniable truth that an online digital euro will be less private than cash. Surveys suggest consumers aren’t keen on central banks accessing personal payments data.
Then there’s the niggling feeling of fixing what ain’t broke at the taxpayer’s expense. Cryptocurrency fever has cooled since the pandemic and venture capital funding has dried up without major disruption — suggesting central banks’ existing tool kit is still enough to defend the financial system and that maybe the inflation fight should be its real priority. Sweden now says it doesn’t need a central bank digital currency, while the UK has abandoned plans for a Royal Mint-issued non-fungible token. There’s the nagging feeling that this whole scene just isn’t hip anymore.
If the technocratic moonshot of a CBDC is to survive the crypto winter, it will need a change of approach. It should at least make its manifesto clearer. There are still good reasons to pursue a digital euro in a world where weird and worrying forms of money are still rolling off the conveyor belt, from stablecoins to AI-backed tokens, with potentially destabilizing effects on cash use and monetary policy. The rise of digital transactions has already handed oodles of personal data to the tech world. With the likes of Worldcoin plotting to scan the planet’s eyeballs to create a digital currency-backed ID based on iris data, CBDCs seem less Orwellian and more like a practical way to hire tech talent and stay in the race.
The latest proposals by the European Commission go in the right direction: They point to a form of digital cash that’s 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, other than to trust that, like Odysseus, central bankers can stay tied to the mast even as the sirens call for more data access. Nor is there any real answer to how to avoid weakening banks’ grip on their funding or risk models, even as they’re prodded to share more data with fintech rivals.
Perhaps what central bankers should do next is kick more of these questions back to politicians and governments. The line between fiscal and monetary policy is inevitably going to blur as CBDCs become real, according to economist Paul Sheard, former vice-chairman of S&P Global Inc., from developments such as distributing helicopter money in a crisis or automating some kinds of tax settlement. Central bankers should confess to not having all of the answers: If the physical euro required a grand bargain between Francois Mitterrand and Helmut Kohl to take off, maybe its digital version also needs a less technocratic touch.
That may also mean years of work ahead to get the digital version right, echoing the time taken to finesse its physical predecessor. Given trust in central banks isn’t ironclad, patience would be justified. At the turn of the millennium, as PayPal Holdings Inc. was just getting started, economist Charles Goodhart dismissed the idea of digital monetary disruption: “Central banks may bring about their own demise by incompetence, (but) they will be comparatively immune to technological innovation,” he said. He had a point: Best walk, not run, into the future of digital central bank money.
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