ECB: CBDCs ‘only solution’ for monetary system’s survival
European Central Bank says cash ‘not fit’ and hails efforts to regulate digital asset space
The European Central Bank has described central bank digital currencies (CBDCs) as the “only solution” to ensuring a “smooth continuation” of the existing monetary system.
A paper published by the eurozone’s central bank described the digital euro as the only regulatory alternative that promises to eliminate the existing “two-layer monetary system”.
The ECB stated: “Since cash is only available in physical form, it is by construction ‘not fit’ for the digital age.” It further observed that regulations aimed at maintaining cash’s large-scale use “are likely to imply large economic costs without clear benefits”.
The paper dismissed concerns that CBDCs might lead to a reduction in the credit supply and countered suggestions that they could be a potentially disruptive force as unfounded.
Paper stresses weaknesses of cryptocurrencies and stablecoins
The ECB described “the explosive mix of BigTech and cryptocurrencies” as a “threat to monetary sovereignty” and welcomed the EU’s Markets in Crypto-Assets Regulation Bill (MiCA) and the US President’s digital asset working group for taking steps to regulate the volatile cryptocurrency sector. In particular, it commended efforts to restrict the issuance of stablecoins to banks and so‐called e‐money institutions.
The paper argued that recent scandals, such as the collapse of the stablecoin Terra LUNA in May “shows that investor trust in such arrangements can deteriorate quickly, and also spill over to other stablecoins”.
It repeated the ECB’s longstanding criticism of proof-of-work cryptocurrencies on environmental grounds and described Bitcoin as “subject to significant price volatility” and a “fiat cryptocurrency”.
This latter description from a central bank currently wrestling with record inflation fuelled in part by two years of substantial quantitative easing will likely irk advocates for the world’s largest cryptocurrency, which has a capped total supply of 21 million BTC.
ECB weighs privacy implications of CBDCs
The paper went on to admit that the subject of privacy in the context of CBDCs requires further research. It said:
“While consumers tend to attribute high importance to privacy in surveys, they tend to give away their data for free, or in exchange for very small rewards in practice. Analyzing the roots for this apparent dichotomy, researchers point to various contributing factors.”
Although the ECB may frame the introduction of a digital euro as a non-disruptive effort to simply continue the current monetary system, critics of CBDCs would argue that this downplays their potential societal implications.
Campaigners fear central bank control
Privacy campaigners have voiced their concern with supplanting anonymous cash with a means of payment distributed, monitored and maintained by a central bank. To them CBDCs would give the state an unnecessary level of insight into, and control over, the spending habits of individuals.
As Agustin Carstens, the pro-CBDC general manager of the Bank for International Settlements (BIS), himself admitted in 2021: “In cash we don’t know, for example, who is using a $100 bill today.
“A key difference with the CBDC is that the central bank will have absolute control on the rules and regulations that will determine that expression of central bank liability. Also, we will have the technology to enforce that.”