The ECB has several reasons for developing a CBDC. They want to reduce reliance on private money. Money put into circulation by the central bank is what we call public money. These are physical banknotes and coins. Private money is money put into circulation by commercial banks. This is money you can access online. With current technological developments and their adoption, cash is becoming increasingly obsolete. The ECB wants to avoid becoming completely dependent on private money because it has a number of downsides.
The Austrian school of economics questioned monetary policy as early as the 19th century. Monetary policy would cause fluctuations in the business cycle. Ideas from the Austrian school have been adopted in the most famous crypto: Bitcoin.
In short, Bitcoin is the largest cryptocurrency in market size. Bitcoin is an alternative payment currency and therefore offers competition with the euro. Friedrich Hayek an economist from the movement of the Austrian school of economics states in a report “Choice in Currency,” that people should be able to choose which currency they want to pay with. As a result, the best currency will be used the most. The ECB sees the increase in the adoption of cryptocurrencies as a threat and would like to have more control over payments itself. By innovating the euro, people would regain confidence in the euro. An example of a possible advantage is that payments could go directly between parties (peer-to-peer), like the possibilities that Bitcoin offers. This means there is no third party to whom you must pay transaction fees. This should make cross-border payments cheaper.
Through the CBDC, the ECB can properly track financial traffic. The ECB would be able to track the financial behavior of individuals. To use the CBDC, users must follow an onboarding process like opening a bank account. In doing so, they provide personal data. Governments have indirect visibility into the data at the ECB. In other words, the financial behavior of individuals may become visible to the government. This creates privacy concerns. For the CBDC to be a success, the ECB needs to ensure the privacy of the people using the CBDC. Studies suggest that people will use a CBDC only if it offers good privacy. Privacy is a basic human right, and it helps against unjust power abuse. But to what extent should we allow privacy within the CBDC process without blurring compliance requirements.
The offline CBDC should provide more privacy for lower transactions. This involves limiting the amount and number of transactions. This should make it less attractive for criminals to abuse the digital euro.
For the online CBDC, the current plan is to screen transaction data in the same way as the regular banking system does. The transaction monitoring will be done by Payment Service Providers, most likely commercial banks. Only the most necessary data will then be shared with the ECB, and this will be done pseudo anonymously. This means that not the individual’s data will be sent, but for example only his/her account number.
Not only Europe is developing a CBDC. Other countries are looking into the possibilities as well. China is working on the Digital Yuan, which they see as an additional tool for monitoring and controlling citizen behavior. Strangely enough, they are offering the same possibilities as the ECB is planning with the Digital Euro. According to a press release of the Central bank of China, the digital yuan would be anonymous for small transactions and monitored according to legal requirements for larger amounts. Again, the data would not be shared with governments, only where required by law. China is trying to get citizens to use the CBDC, but less than 20% actually do so. It seems that the people who created a wallet did so to participate in the lotteries offered when creating an account and not to use the CBDC.
China is trying to get its citizens to use the E-yuan because the CBDC could be programmable. This means that the government can attach conditions to the money. This means that the government could potentially only allow people to spend the CBDC for certain spending purposes. For example, the government can stipulate that their citizens cannot buy more than one airline ticket. This way of financial control is the biggest dream of an authoritarian superstate. Europe says it will not make the digital euro programmable and wants to establish this by law.
Is programmability always bad? This can be debated. Programmability can also protect individuals. For example, a gambling addict could gamble only a limited portion of his income, or an alcoholic could buy limited liquor. People in debt can also be helped by using part of their income immediately to pay off debts. However, this does raise the question of whether this is not the responsibility of the individual rather than the government.
The government could also have an interest in programmable money. They could send grants directly from the government to the allocation for which the grant is intended. Thus, subsidies could not be used for other purposes. In addition, taxes could be paid directly to the government.
Venezuela launched the Petro in 2018, this CBDC would be backed by commodities such as oil, gold and diamonds. Therefore, its value would be much more stable than the bolivar, Venezuela’s currency, which is subject to hyperinflation. Despite the government’s effort, adoption of the Petro remained limited. After a corruption scandal involving the mismanagement of the underlying commodities, Venezuela decided to stop the CBDC project.
A CBDC was also introduced in Nigeria: the eNaira. The population shows little interest. The government is trying to encourage the eNaira by placing restrictions on cash, among other stimulants. In the Bahamas, the Sand Dollar is also not a success despite all the incentives offered by the government.
We can conclude that for the innovative digital euro to be a success, the ECB will have to be able to safeguard the privacy of its users. More importantly, convince the public that their data is safe with the ECB. Global examples show that there is little interest in a CBDC. The most common argument against this is privacy concerns. Overall, the question remains: how do we meet the compliance requirements without citizens sacrificing their privacy?
In this article, by CBDC, we mean retail CBDC.