Point of view: The euro does not only come from the central bank

Dhe “digital euro” is on everyone’s lips. In the past year, there was a lot to be read in the media about the digitization of money – especially about the global development of so-called “Central Bank Digital Currencies” (CBDCs). High demands are often placed on central banks. The new type of money should not only digitize payment processes and enable programmable transactions through the use of blockchain technology, but at the same time be as anonymous and flexible as cash. But are these expectations realistic?

We advocate rethinking the term “digital euro” and including initiatives from the private sector in the discussion. Because just like in today’s monetary system, private forms of money will also enable the majority of transactions in the economy and society in the future – in particular innovative forms of payment using blockchain technology. In short: What is an integral part of the payment system today and is used by all of us every day will also be the case in the future – the euro, technically provided by banks and other private companies, usable in bank accounts, online banking and on smartphones.

How useful is the “digital wallet”?

2021 was undoubtedly the year of CBDCs: first solutions abroad went live, the Chinese e-Yuan was tested extensively with trials involving over 100 million people, and the ECB announced the possible launch of a CBDC investigate. However, when developing CBDCs, central banks are not primarily concerned with whether blockchain technology is used or not. Rather, they are examining whether physical banknotes and euro coins as well as the digital money of commercial banks should be supplemented by a digital euro from the central bank at all – i.e. the “digital wallet”.

This decision should only be made when ensuring that large outflows of funds from bank accounts to digital cash are prevented. If this does not happen, it is feared that banks would have to refinance themselves for a longer period of time and thus more expensively, which could result in rising lending rates and impede lending and the creation of money. Limiting the amount of CBDC per citizen means that the main type of money in today’s economy – bank deposits – cannot be replaced by CBDCs. It is therefore necessary to find solutions for how bank money or other private types of money can be transferred via blockchain.

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A much-discussed form of digital money are the so-called “stablecoins”, the circulating amount of which increased sharply in 2021. While most stablecoins are currently used for trading in cryptocurrencies or in the blockchain-based “decentralized finance” area, some providers are already working intensively on use cases in the real economy. With its payment app Novi and the Paxos stablecoin, Facebook is already enabling free cross-border transactions to Guatemala as part of a pilot project.

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