In the digital economy, cash is no longer a useful tool and a central bank digital currency (CBDC) is the “only solution” to continue the existing monetary system, according to a new paper from the European Central Bank (ECB).
The Eurozone central bank recently published a paper entitled “The Economics of Central Bank Digital Currency”. The authors assessed the impact on the financial system and examined privacy and digital payments.
The researchers concluded that a CBDC, like a digital euro, would be the “only solution” to allow for a “smooth continuation” of the current monetary system. Despite widespread concerns that CBDCs would constrain the supply of credit and act as a disruptive force in financial markets, the paper dismissed those concerns as unfounded.
Digital money is crucial in a digital economy, the ECB noted. As “cash loses its appeal as an efficient means of payment,” a CBDC is a necessary tool to install. Although research identified disadvantages of adopting a unified digital money system, such as B. the sluggish pace of settlements, market developments and adoption, the paper noted that “a digital update of cash” was critical to advancing “the two-tier system of public and private money.”
After all, cash has “large economic costs without clear benefits”, i.e. it is “not ‘fit’ for the digital age by nature”.
Digital money could raise privacy concerns, authors warned. However, researchers say there is a “privacy paradox”: consumers will stress the importance of privacy in surveys, but they will give up their personal information for free or for a small reward.
A woman holds euro banknotes in this May 30, 2022 photo. (Dado Ruvic/Reuters)
“From a public policy perspective, these observations warrant further skepticism about the ability of market forces to achieve effective levels of privacy,” the report says.
The paper also opposed cryptocurrencies and stablecoins, calling them a “threat to monetary sovereignty.” It welcomed President Joe Biden’s Digital Assets Working Group to put together a regulatory framework for the crypto sector, as well as the myriad other regulations under consideration around the world.
“These proposals would bring new forms of digital money into the regulatory arena and help address some of the key concerns surrounding monetary sovereignty and financial stability,” the paper said.
The rise of CBDCs
Around the world, many governments and central banks have been exploring CBDCs as a potential successor or complement to physical money.
For example, in January, the Federal Reserve released a discussion paper titled “Money and Payments: The US Dollar in the Age of Digital Transformation.” It examined the pros and cons of a potential US CBDC.
Speaking to Congress during his semi-annual monetary policy report in June, Fed Chair Jerome Powell recommended that a digital dollar “is something we need to explore as a country” that “shouldn’t be a partisan thing.”
“It’s a very important potential financial innovation that will affect all Americans,” he told the House Committee on Financial Services. “Our plan is to work on both the political side and the technological side over the coming years and eventually come to Congress with a recommendation.”
Powell added that if the United States were to create a digital dollar, it would have to be issued by the federal government, not a private entity.
“One question about CBDCs is do we want a private stablecoin to become the digital dollar? I think the answer is no,” Powell said. “If we want a digital dollar, it should be government-guaranteed money, not private money.”
Congress calls for faster action on a digital dollar. A bipartisan group of members of Congress led by Rep. French Hill (R-Ark.) and Rep. Maxine Waters (D-Calif.) introduced legislation this month ordering the Fed to speed up its work on a CBDC.
“As countries around the world compete to launch digital versions of their own currencies, America cannot be left behind,” Waters said in a May statement ahead of a hearing on the benefits and risks of CBDCs.
Last month, ECB President Christine Lagarde championed a digital euro, claiming that digitizing the official currency of 19 of the 27 member states of the European Union could “achieve” stability and public access.
According to Lagarde, a digital euro would complement cash rather than replace it. She also pointed out that a CBDC would only be successful if it listened to the needs of consumers and businesses and ensured privacy safeguards were put in place from the start.
This, Lagarde wrote in a blog post, ensures that a digital euro “serves as an anchor for the entire payment system.”
US, Europe take on the digital yuan?
But while the United States and Europe could seek to take the lead on such a critical issue in the global monetary system, market analysts are noting that advanced economies could react to China.
After seven years of intensive studies, the People’s Bank of China (PBoC) launched the digital yuan in 2021. The e-yuan is a CBDC that is trying to replace some of the cash currently in circulation as fewer Chinese consumers use physical money. It is estimated that cash accounted for about a quarter of point-of-sale transactions in 2020, compared to almost 75 percent in 2012.
Some claim that Beijing is trying to dismantle the global monetary system, but officials say otherwise.
Speaking at a forum in Shanghai in December 2020, former PBoC chief Zhou Xiaochuan noted that technology is the primary goal, not currency dominance. However, Richard Turrin, author of Cashless: China’s Digital Currency Revolution, told CNBC in March that a digital yuan could challenge the greenback in international trade deals over the next decade.
“Remember that China is the largest trading country and you will see that the digital yuan is slowly displacing the dollar when you buy things from China,” he said. “If we go about five to 10 years ahead, yes, the digital yuan can play a significant role in reducing the use of the dollar in international trade.”
The yuan has become one of the most popular currencies for cross-border transactions in 2021, accounting for 2.7 percent of global payments, the highest in six years, January statistics from the Society for Worldwide Interbank Financial Telecommunications (SWIFT) show. The US dollar accounted for more than 40 percent of international transactions.
Any attempt to dethrone the US dollar as the main international reserve currency would take time. According to International Monetary Fund (IMF) data on the currency composition of official foreign exchange reserves (COFER), the dollar accounted for almost 60 percent of reserves in the first quarter of 2022. The yuan accounted for less than 3 percent.
consequences
Andrew Moran covers Business, Economics and Finance. He has been a Toronto-based writer and reporter for more than a decade, with bylines for Liberty Nation, Digital Journal and Career Addict. He is also the author of The War on Cash.
Comments are closed.