The digital euro and central bank digital currencies: Beware of taking off too early

Bofinger, Peter Research Report The digital euro and central bank digital currencies: Beware of taking off too early IMK Study, No. 95 Provided in Cooperation with: Macroeconomic Policy Institute (IMK) at the Hans Boeckler Foundation Suggested Citation: Bofinger, Peter (2024) : The digital euro and central bank digital currencies: Beware of taking off too early, IMK Study, No. 95, Hans-Böckler-Stiftung, Institut für Makroökonomie und Konjunkturforschung (IMK), Düsseldorf This Version is available at: https://hdl.handle.net/10419/302865 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ STUDY No. 95 • September 2024 • Hans-Böckler-Stiftung THE DIGITAL EURO AND CENTRAL BANK DIGITAL CURRENCIES: BEWARE OF TAKING -OFF TOO EARLY Peter Bofinger 1 ABSTRACT The paper discusses central digital currencies (CBDCs) with an analytical focus on the European Central Bank's Digital Euro (D€) project, which provides a unique lens for assessing the potential and challenges of CBDCs. The paper differs from the literature on CBDCs and the D€ by adopting a systemic perspective that distinguishes between the role of CBDCs as a new payment object and as a new payment system based on CBDC accounts. In a worst-case scenario, the D€ project could be a total flop, with people not opening accounts and the system failing to compete with existing platforms. This would be in line with the dismal experience of countries that have already introduced CBDCs. In a more positive scenario, many households would open D€ accounts alongside commercial bank accounts, potentially reducing the dominance of US platforms. However, even in this scenario, it is unlikely that there will be significant holdings of D€ deposits as a means of payment, making the D€ payment system an inefficient and costly detour between existing commercial bank accounts. The offline version remains difficult to justify. Our CBDC tracker shows that the ECB's strong commitment to the D€ is unique among central banks in advanced economies. Many of them, including the Federal Reserve, currently rule out the option of a retail CBDC. Thus, the ECB's unconditional commitment to the D€ carries a high risk of failure. It is therefore unclear why the ECB is not considering a scheme based on the existing SEPA infrastructures. ————————— 1 Prof. Dr. Peter Bofinger, Julius-Maximilians-Universität Würzburg, [email protected]. The Digital Euro and Central Bank Digital Currencies: Beware of Taking-Off Too Early August 2024 Research Project for the Hans-Böckler-Stiftung Professor Dr. Peter Bofinger Julius-Maximilians-Universität Würzburg II Table of contents 1 Introduction ..................................................................................................................... 1 2 What is CBDC? ................................................................................................................ 4 2.1 CBDC as a payment object ............................................................................................ 6 2.2 CBDC as a payment scheme .......................................................................................... 7 2.3 A systemic approach ..................................................................................................... 8 3 The Digital Euro: A Frontrunner in the CBDC Run ............................................................... 8 3.1 What are the objectives of the ECB’s project? ................................................................. 8 3.2 The D€ as a payment object ........................................................................................... 9 3.2.1 The macroeconomic perspective: Is there a need for a “monetary anchor” ............. 10 3.2.2 The microeconomic perspective: Why should private households have a demand for holding D€ as a payment object? .................................................................................... 13 3.3 The D€ as a payment system ........................................................................................ 15 3.3.1 Payment transactions within the D€ scheme .......................................................... 17 3.3.2 The acceptance of the D€ payment scheme ........................................................... 18 3.3.3 The dominance of the ECB in the European retail payment system .......................... 19 3.3.4 The difficulty of implementing the offline solution ................................................... 22 4 An alternative: a pan-European payment scheme based on existing infrastructures ......... 24 5 Scenarios for the D€ ....................................................................................................... 25 6 The international perspective: a sobering picture............................................................. 27 7 Summary: Beware of taking off too early .......................................................................... 28 References ........................................................................................................................... 29 Annex: A CBDC tracker based on central bank statements and experiences ............................ 32 III The Digital Euro and Central Bank Digital Currencies: Beware of TakingOff Too Early Executive Summary Central Bank Digital Currencies (CBDC) have become a focal point for central banks worldwide: The Bank for International Settlements (BIS) recent survey (2024) shows that 94% of 86 responding central banks were engaged in CBDC work by the end of 2023. The paper discusses the CBDC with an analytical focus on the European Central Bank's (ECB) Digital Euro (D€) project. It offers a unique lens for assessing the potential and challenges of CBDC in an advanced currency area. The paper also provides anecdotical evidence on CBDC projects that have already been implemented. In addition, based on statements of central banks in advanced economies and other major central banks, the paper surveys the current state of discussion on CBDC. The paper differs from the literature on CBDC and the D€ by taking a systemic perspective, which consequently differs between the role of CBDC as a new payment object and as a payment system based on CBDC accounts. The ECB's motivations for the D€ include macroeconomic and microeconomic considerations. The macroeconomic justification of a retail D€ as a “monetary anchor” is questionable as long as there is sufficient for central bank money by commercial banks. This also applies to argument that private "digital currency areas" might displace established monetary units by private currency units. So far, there is no evidence of such developments in the retail space. Thus, from a macroeconomic perspective there is no need of the D€ as a payment object. Microeconomic considerations do not indicate a demand for holding D€ as a payment object. As far as the online version of the D€ is concerned, there are no benefits for private households holding D€ ias a payment object. The legal difference between central bank deposits and commercial bank deposits is irrelevant for small deposit holdings. Moreover, holding D€ deposits in parallel with commercial bank deposits increases the risk of negative balances for low-income households which involves high overdraft interest rates. In particular, due to the “waterfall fall” functionalities of the D€ scheme, the D€ payment system can be used with zero D€ holdings. The offline version of the D€ is in many cases inferior to holding cash. Consumer surveys indicate only very limited use cases. The proposed D€ payment system increase the number of payment transactions by a factor of two to three. This is due to the coexistence of commercial bank accounts and D€ accounts which requires two separate settlements schemes (TARGET2 and N€XT). The need to open specific bank accounts for the use of D€, in contrast to credit card schemes IV and PayPal, may hinder widespread public acceptance. In addition, as commercial banks have to open and manage D€ accounts free of charge, they are unlikely to promote D€ accounts. So far it is unclear which institution might operate run the D€ payment system, i.e. the network through which information flows between payers and payees are sent. If the ECB were to take on this role, it could stifle innovation and competitiveness vis-à-vis private providers. Implementation problems with the offline version could prevent smartphone payments, which would require not very user-friendly payment cards. Given these complexities, it is surprising that the ECB does not even mention the alternative approach of creating a pan-European payment system based on existing infrastructures. A natural candidate is the SEPA Instant Payment System, as the ECB explicitly acknowledged 2019. As the European Payments Initiative argues, the D€ scheme does not offer any new value compared to SEPA Instant Payments. This approach could achieve the ECB's objectives, as supported by the Banque de France's endorsement of an EPI-payment solution for European payment market sovereignty. In a worst-case scenario, the D€ infrastructure could see limited adoption, with people not opening accounts and the scheme failing to compete with existing platforms. As our survey of existing CBDC schemes shows, this would in line with the consistently poor experiences of countries that have already introduced CBDCs. In a more positive scenario, the D€ payment scheme will reach a wide acceptance, with a high number parallel D€ accounts alongside commercial bank accounts potentially reducing the dominance of US payment platforms. However, even in this scenario, significant holdings D€ deposits are unlikely, making the D€ scheme an inefficient and costly detour between existing commercial bank accounts. The offline version remains hard to justify. Our “CBDC tracker”, based on statements of central banks in advanced economies and of some other major central banks, shows that the ECB's absolute commitment to its D€ project is unparalleled. Many central banks, including the Federal Reserve, currently explicitly ruling out the option of a retail CBDC. In conclusion, the perception of a widespread retail CBDC launch off is misleading. The ECB has embarked on a dangerous adventure with high costs for the taxpayer and high risks for its reputation. Therefore, central banks considering implementing CBDC should carefully scrutinize the D€ project. 1 1 Introduction As the recent BIS survey on CBDC (BIS 2024) shows, more and more central banks are working on CBDC. From a sample of 86 responding central banks, at the end of 2023, 94% were engaged in CBDC work (Chart 1). According to the CBDC Tracker provided by the Atlantic Council, in May 2024 134 countries and currency unions, representing 98% of global GDP, are currently exploring a CBDC. In May 2020 that number was only 35 (Atlantic Council 2024).1 Chart 1: Share of central banks working on CBDC as a percentage of respondents Source: BIS (2024) The view that CBDC is becoming an indispensable element of a national monetary system in same way as cash is also supported by the strong efforts of the European Central Bank (ECB) to launch a Digital euro (D€). After an investigation phase (November 2021-October 2023), the ECB is now in a preparation phase (November 2023-October 2025) after which a phase of “potential development and rollout” which is scheduled. While the ECB is a frontrunner in the group of advanced economies, China and India have already implemented CBDC schemes in their countries. In this paper, we want to take a closer look at the discussions on CBDC, especially in advanced economies and major emerging market economies. In most central bank reports and speeches of central bank representatives, a more nuanced view can be found that differs from the ECB’s enthusiastic commitment to CBDC. In any case, the experience of those countries that have already introduced CBDC suggests a cautious assessment of the necessity and prospects of success of CBDC. 1 https://www.atlanticcouncil.org/cbdctracker/ 2 The ECB’s D€ project provides a particularly good basis for assessing the prospects of CBDC. It is already relatively well developed and therefore makes it possible to identify the problems that could arise with such a fundamental reorganization of a country's or a currency area’s monetary order. We will therefore present and discuss the Digital euro in detail below. While the D€ has been discussed in earlier papers (Bofinger and Haas 2023b), new ECB publications, notably "Update on the work of the digital euro scheme's Rulebook Development Group" (ECB 2024a), "Progress on the preparation phase of a digital euro: First progress report" (ECB 2024b) and a "Stocktake on the digital euro" (ECB 2023b) allow a more specific analysis of the D€ project. In section 2, we present a systemic approach on CBDC. It is characterized by the insight that there is no such thing as a “CBDC” or a “Digital euro”. For an analysis of payment systems, it is necessary to differentiate between payment objects, payment instruments and payment schemes. We will see that the prospects for CBDC vary depending on the individual constituent elements. In section 3, we present and discuss the ECB’s D€ project. We show that the motivations of the ECB for introducing the D€ are based on macroeconomic and microeconomic considerations. D€ as a payment object In section 3.2 we first analyze the justification for the D€ as a new payment object. We show that there is no need for a retail D€ as a monetary anchor, as long as there is sufficient demand from commercial banks for central bank money. We also question the concept of “digital currency areas” as a justification for the D€. So far, there is no evidence that digital retail payment platforms plan the introduction of “private currencies”. In summary, we do not see macroeconomic issues that call for the introduction of D€ as a payment object. From a microeconomic perspective, it is difficult to see why private households should hold D€ deposits (online version of the D€). The difference between a central bank deposit and a commercial bank deposit, or central bank money and private money, is irrelevant for small deposit holdings. However, for low-income households, holding D€ deposits increases the risk of a negative balance in the commercial bank account, which is very costly. Due to the waterfall functionalities, it is not necessary to have a positive D€ balance to use the D€ payment system. As for the offline version, which requires a positive D€ balance in a wallet, the question is what advantages it can offer over using cash. Consumer surveys confirm our finding that there is no obvious use case for this version of the D€. D€ as a payment scheme In section 3.3 we analyze the rationale of a payment system based on D€ accounts. We show that the scheme envisaged by the ECB leads to a doubling or tripling of settlement 3 transactions due to the parallel scheme of bank accounts and settlement schemes (TARGET and N€XT). The need to open specific accounts for the use of the scheme, which is not required for credit card schemes and PayPal, might negatively affect the acceptance of a D€ payment scheme. This is particularly challenging as the creation of new markets requires “dyadic alliances” between the main players, i.e., commercial banks and the central bank. In the case of commercial banks, it is not very plausible that they would actively promote the opening of D€ accounts. The insight that it might be difficult to convince people to a D€ has led central bankers to think of enforcing D€ accounts by making public payments to such accounts only. The blueprints for the D€ payment system indicate a dominant role for the ECB in a D€ payment scheme. This could have negative effects on the innovation activity of a European payment scheme and impair its competitiveness vis-à-vis the dominant private payment schemes. Finally, the payment system based on the offline version faces serious implementation problems. They could prevent the use of smartphones as payment instruments requiring payment cards which are not very user-friendly. In section 4, we briefly present an alternative approach to creating a pan-European payment system that is independent of US payment platforms. Surprisingly, the ECB has already floated the concept of using the SEPA instant payment system as the basis for such a system in 2019 under the heading "SEPA for cards". The European Payments Initiative points out that the € does not offer any new added value compared to SEPA instant payments. That such an approach could also reach the objectives that the ECB is trying to reach is indirectly confirmed by the Vice-Governor of the Banque de France, who argued that an EPI-payment solution “will help strengthen the sovereignty of the European payment market by providing an alternative to using foreign schemes such as Mastercard and Visa”. In section 5, we present two scenarios for the D€. In a worst-case scenario, the entire infrastructure would not be actively used by the population. People would not open accounts and the scheme would not be able to withstand the competition with existing platforms. This would be in line with the experience of those countries that have already implemented CDBCs. In a positive scenario, the D€ payment scheme would be designed attractively enough to be used by the population which is willing to open D€ accounts in parallel to their commercial banks. In such a scenario, it might even be possible to reduce the dominance of US payment platforms. However, even in such positive scenario it is not likely that the D€ would be used as a payment object, i.e., that people would hold significant deposits on their D€ accounts. As a result, the D€ payment scheme would turn out as an inefficient 10 D€ on a smartphone wallet. Like cash, D€ is created by withdrawing from a D€ bank account or from an ATM. The ECB plans holding limits for both forms of D€ holdings. For the online version the holding limit is not yet defined, but it seems that it will not exceed 3.000 euro.6 Due to antimoney laundering and combating the financing of terrorism (AML/CFT) policies the holding limits for offline D€ will be much smaller. It might also be necessary to set limits for the number and the amount of transactions. Thus, the ECB wants to restrict the holding of D€ to the monetary function of a means of payment by discouraging its use a store of value. The holding limits for D€ accounts and the lack of an overdraft facility require a so-called waterfalland reverse-waterfall functionality for the D€: - “Waterfall”: If a D€ account is credited by an amount that exceeds the holding limit, the excess amount is automatically transferred to the payee’s commercial bank account. - “Reverse Waterfall: If a payment from a D€ account exceeds the deposit on that account, the difference is automatically provided by a transfer from the payer's commercial bank account to his D€ account. An analysis of the object function raises two interrelated questions: - How can the D€ contribute to the “monetary anchor role” that the ECB emphasizes? - What is the use case for private households to hold D€ online or offline for making payments? 3.2.1 The macroeconomic perspective: Is there a need for a “monetary anchor” While the BIS survey (BIS 2024) shows that for central banks in advanced economies the monetary policy implications of CBDC are not the main motivation (Chart 2), the monetary anchor plays a dominant role in the ECB’s argumentation for the D€. Former member of the ECB executive board, Fabio Panetta (2022a), explains the role of the monetary anchor as follows: “(…) even digital payments will ultimately depend on the anchoring role of public money to function smoothly. Confidence that ‘one euro is one euro’ whatever form it takes rests on our ability to convert, at par, private money – such as funds held in bank deposits or digital wallets – into public money, which is the safest form of money available. This 6 A recent Bundesbank research indicates that the optimal amount could be in the range of 1,500 to 2,500 Digital euro per person. See Bidder, R. et al. (2024), CBDC and banks: Disintermediating fast and slow, Deutsche Bundesbank Discussion Paper No 15/2024. 11 possibility of conversion reinforces confidence in the various forms of private money used for euro payments, ensuring the smooth functioning of the payment system.”7 In Bofinger and Haas (2023a), we have argued that the ability to exchange deposits from a commercial bank account into a D€ account in fact contributes to the convertibility of private money, which is particularly valuable in a crisis. Thus, a valid argument can be made that the ability to hold D€ deposits could increase the confidence in private money. But the institutional design of the D€ as envisaged by the ECB, is not compatible with an such an anchor role: - Making a strong case for the convertibility of commercial bank money into central bank money is not compatible with rather low holding limits. - The ECB does not plan to allow D€ deposits for the corporate sector. - The demand for central bank deposits in times of instability would not be a demand for the D€ as a means of payment, but as a store of value. Low holding limits for D€ deposits also question the ECB’s argument that the D€ “is a precondition for the continued effectiveness of the ECB’s monetary policy, which is aimed at preserving price stability”. Moreover, it can be shown that for an effective central bank control over the process of credit and money creation, it is sufficient that commercial banks have a stable demand for central bank money (Bofinger and Haas 2023a).8 With the instrument of minimum reserves, the central bank can always generate a sufficient demand for bank reserves. In sum the arguments of the ECB for the monetary anchor role, which it so far has not presented in a comprehensive theoretical analysis, are not very convincing. This also applies to the argument that the D€ is required to maintain the convertibility into cash (Brunnermeier, 2024)9 in an environment where the use of cash is declining in retail payments. The solution to this problem is not the issuance of a D€ but maintaining an adequate cash infrastructure by the ECB. In fact, the ECB promises in its “Eurosystem cash strategy” that cash will remain “widely available”: “The ECB and the national central banks of the euro area are committed to making sure that cash remains widely available and accepted. We therefore welcome the European Commission’s proposal for a new EU Regulation to strengthen the legal tender status 7 https://eaccny.com/news/chapternews/ecb-speech-fabio-panetta-public-money-for-the-digital-era-towards-a-digital-euro/ 8 https://www.suerf.org/publications/suerf-policy-notes-and-briefs/the-digital-euro-cbdc-as-a-monetaryanchor-of-the-financial-system/ 9 „Traditionell ist die Verankerung des Euros im Bankensystem so gestaltet, dass die Konvertibilität zum Bargeld das Entscheidende ist. Wenn ich ein Bankkonto habe, dann kann ich das Guthaben in Bargeld umwandeln. Wenn die Bedeutung des Bargelds zurückgeht, dann geht diese Verankerung verloren.“ 12 of euro cash. The proposal aims to ensure that access to and acceptance of euro banknotes and coins is legally guaranteed throughout the euro area.”10 Box: The flawed concept of “digital currency areas” The announcement of Facebook to create a payments system with a new currency (Libra)11 was an important trigger for the engagement of many central banks in the field of Central Bank Digital Currencies. Central bankers feared that private currencies might outcompete public currencies. Brunnermeier et al. (2019) supported this view by propagating the concept of “digital currency areas”: „The most important consequence of a system based on digital platforms may be that agents begin to write contracts in a unit of account specific to a platform rather than the central bank’s unit of account. A change in the unit of account convention may become more likely with a large technological change that eliminates the use of cash and shifts economic activity towards platforms with their own units of account.” 12 The failure of the Libra concept shows that the risk of private monies crowding out public monies is not very high. First, even the Libra currency was not originally designed as a private currency, but as a currency basket made up of public monies. Second, this design was soon abandoned in favor of a concept of stablecoin Libras based on national currencies (Dollar-Libra, Euro-Libra, Yen-Libra, etc.). But this did not save the project. The main problem with creating private currencies or units of account is that currencies are like languages that are deeply enshrined in the minds of people. Therefore, it requires high inflation episodes for people to switch to foreign currencies. Another major flaw of Libra was its design, which required a positive balance on a Libra account in order to make payments. As the PayPal scheme shows, a successful payment scheme simply taps into existing accounts. Thus, at least for the time being, the risk of private currencies gaining a dominant position that would threaten the unit of account role of the existing currencies and thus the business of central banks, cannot be regarded as a justification for introducing a D€.13 10 https://www.ecb.europa.eu/euro/cash_strategy/html/index.en.html 11 https://whitepaper.io/document/475/libra-1-whitepaper 12 Brunnermeier, M. K., James, H., und Landau, J.-P. (2019). The Digitalization of Money. NBER Working Paper Series, No. 26300. 13 Brunnermeier (2024) still believes in his concept: „Durch die Digitalisierung besteht die Gefahr, dass viele private Gelder entstehen werden, mit denen man Transaktionen durchführen kann, die nicht notwendigerweise an den Euro gekoppelt sind. Diese können an andere Währungen gekoppelt sein, sie können aber auch eigenständig existieren. Der Vorteil des digitalen Euro ist, dass man die Koppelung an den Anker des Euros weiter behält und diese Gefahr für die Einheit der Währung abwendet.“ Wortprotokoll der 81. Sitzung Finanzausschuss Berlin, den 19. Februar 2024 13 3.2.2 The microeconomic perspective: Why should private households have a demand for holding D€ as a payment object? The macroeconomic rationale of the D€ can also be assessed from a microeconomic perspective. For the D€ to be an effective monetary anchor, there would have to be sufficient demand for holding D€ as a payment object. As table 1 shows, the holding of D€ can either be regarded as a substitute for holding deposits on a traditional bank account or for holding cash in a physical wallet. Online use of the D€ The main difference between of a deposit in a D€ account and a commercial bank account is the fact that the commercial bank deposit implies only the right to convert it into central bank money while the D€ deposit is central bank money. In its publicity campaigns for the D€, the ECB argues with the safety of the D€: “A euro will always be a euro. One digital euro would always be worth exactly the same as a €1 coin.” 14 But in practical life this differentiation is of little relevance due to the deposit insurance schemes which protect bank deposits in the EU to up to 100.000 euro. It would be a dangerous strategy it the ECB tried to sell the D€ with argument that bank deposits are not 100% safe. One might think that, at least in the introductory phase, the demand for CBDC deposits could be increased by paying attractive interest rates. However, this is excluded by Article 16 (“Limits to the use of the digital euro as a store of value”) of the Proposal for a Regulation of the European Parliament and of the Council: “Within the framework of this Regulation, the digital euro shall not bear interest.” While there are no obvious benefits of holding deposits in D€ accounts, one can argue that this could lead to higher banking cost, especially for people with low incomes. A parallel holding of deposits on the commercial bank and the D€ account increases the risk of an overdraft of the commercial bank account which is very costly. In addition, as the D€ account does not provide an overdraft facility, the commercial bank account will always remain the dominant account. One might think that the ability to use the D€ payment scheme might be an incentive to hold deposits on the D€ account. But due to the waterfall functionalities, the D€ payment scheme can be used while always keeping a zero balance on the D€ account. Therefore, from an information and transaction costs perspective, the best solution for households is to maintain a zero balance on the D€ account and to take full advantage of the waterfall functionality. 14 https://www.ecb.europa.eu/euro/digital_euro/features/html/index.en.html 14 This also shows that the ECB’s argument that the D€ has “cash-like features” does not apply to the online version. While using the cash payment systems requires a holding of cash, the D€ payment system can be used with zero holdings of D€ deposits. Offline use of the D€ The offline use of the D€ requires holding a positive D€ balance in the digital wallet. In this regard, the D€ is like cash. But the use case for the offline use is not very clear. Even without internet connection, offline credit payments are already possible, e.g. during flights. When paying with a credit card on a plane, the offline credit line stored on the card applies. A “Study on Digital Wallet Features” produced by Kantar (2023) for the ECB questioning focus groups comes to the following conclusion: “The possibility of paying offline was considered the most innovative of the presented payment features. None of the participants recalled having used this option via other payment methods. In every country, most participants acknowledged the convenience of this function for situations where they do not have access to the internet (e.g. in areas without internet coverage, when running out of data, or when using in-flight mode). However, most also noted that these situations are rather limited, so they thought they would rarely use this option.” 15 Like cash, holding positive D€ balances on a smartphone wallet implies the risk that one loses the smartphone or that it is stolen. Therefore, compared with the online use the only benefit of the offline use is a higher degree of anonymity. But if anonymity is the relevant criterion, it is not clear why the Digital euro should be a superior solution to cash. For a comparison of the advantages of offline D€ holdings compared with cash one can use the information on the Bundesbank’s website, which provides a comprehensive description of the advantages of using cash (Table 4).16 Table 4: The advantages of using cash Cash (Bundesbank) Digital Euro “It ensures your freedom and autonomy. Banknotes and coins are the only form of money that people can keep without involving a third party. You don’t need access to equipment, the internet or electricity to pay with cash, meaning it can be used when the power is down or if you lose your card.” The D€ requires equipment in the form of a smartphone and it also requires that the battery is not empty “It’s legal tender”. The proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the establishment of the “Digital euro” from 28 June 15 https://www.ecb.europa.eu/press/pr/date/2023/html/ecb.pr230424_1_annex~93abdb80da.it.pdf 16 https://www.bundesbank.de/en/tasks/cash-management/the-eurosystem-cash-strategy/the-eurosystem-cash-strategy-and-the-role-of-cash-859166 15 2023 grants the D€ legal tender status in Article 7. But Article 9 defines a set of exceptions which includes the right for a microenterprise not to accept the Digital euro, unless it accepts comparable digital means of payment. Thus, while cash must be accepted generally, this would not be the case for the D€. It ensures your privacy. Cash transactions respect our fundamental right to have our privacy, data and identity protected in financial matters Even if the offline use would allow a higher degree of anonymity, it would not reach the anonymity of cash It’s inclusive. Cash provides payment and savings options for people with limited or no access to digital money, making it crucial for the inclusion of socially vulnerable citizens such as the elderly or lower-income groups The use of the D€ requires a certain degree of digital competence which not guaranteed by elderly or lower income groups “It helps you keep track of your expenses. Cash allows you to keep closer control of your spending, for example by preventing you from overspending.” Digital solutions cannot substitute the constraint set by physical money. It’s fast. Banknotes and coins settle a payment instantly.” In this regard, the D€ and cash are similar It’s secure. Cash has proven to be secure in terms of cybercrime, fraud and counterfeiting. And, as it’s central bank money, it doesn’t entail financial risks for either the payer or the payee.” There is also no obvious difference between the D€ and cash. “It’s a store of value. Cash is more than just a payment instrument. It allows people to hold money for saving purposes without default risk. It is useful for small person-to-person gifts and payments. For example, parents can entrust small amounts of cash to their children for small purchases, (…) Cash also contributes to the financial literacy of children.” This aspect clearly favors the using of cash instead of D€ which is explicitly designed to avoid the use of the D€ as a store of value. In sum, there is no obvious case for offline use where the D€ would be superior to cash. 3.3 The D€ as a payment system For the ECB the need of a pan-European payment solution and the sovereignty of the European payment system play a decisive role in its D€ project: “The Eurosystem’s Digital euro project aims to ensure central bank money evolves alongside current payment preferences and trends, as well as to facilitate electronic payments everywhere in the euro area and strengthen Europe’s strategic autonomy.” 17 17https://www.ecb.europa.eu/euro/digital_euro/progress/shared/pdf/ecb.deprp202406.en.pdf 16 The ECB justifies the need for the D€ with the following argument: “Currently, there is no European digital payment option that covers the entire euro area”18 In 2019, the ECB made a similar statement but acknowledging that there are no problems paying all over Europe with one card: “The Eurosystem acknowledges that, in general, European cardholders are able to pay with one card all over Europe. However, at present the pan-European acceptance of cards issued under a national card scheme is entirely reliant on co-badging with an international card scheme.” While the dominance of the US payment platforms, especially in card schemes, can be regarded as a market failure which justifies a government intervention, it is not obvious whether a payments scheme based on the D€ would be the best solution to this problem. Two different options are possible: - Introducing a D€ payment scheme which connects the existing national schemes indirectly by the creation of parallel infrastructures based on D€ accounts. - Connecting the national infrastructures directly by the creation of a Europeanwide card scheme or by making the existing schemes interoperable throughout the Europe. Since embarking on the D€ project the ECB has never explicitly discussed the pros and cons of such an alternative approach. This approach would have the advantage that one could use the existing payment infrastructures instead of creating a completely new payment universe. In addition, it would be in better condition for the competition with US payment platforms as it would be based on retail payment schemes which are widely in use and with which customers are already familiar. 18 https://www.ecb.europa.eu/euro/digital_euro/html/index.en.html 17 3.3.1 Payment transactions within the D€ scheme The ECB presents the D€ payment system with the following chart (Chart 4): Chart 4: The D€ payment scheme Source: ECB (2024a) It shows the special feature of the D€ payment system that it can only operate with D€ accounts. Compared with existing payment schemes this leads to a tripling of transactions: - In order to make a payment form a payer to a payee, the scheme transfers money from the payer’s its commercial bank account to its D€ account (funding/reverse waterfall). This transaction is executed via TARGET2. - From the D€ account of the payer a transaction is made to the D€ account of the payee. This transaction is executed via N€XT, the ECBs scheme for D€ online payments. 19 - As firms will not be allowed to hold positive D€ balances, the money will be immediately transferred to the payee’s commercial bank account (defunding/waterfall) which again requires a TARGET2 transaction. In the unlikely case, that the payer holds a positive balance on its D€ account, which is sufficient for the payment, the transactions only double. Thus, compared with a solution based on existing infrastructures the D€ scheme requires - a parallel system of bank accounts and 19 “The digital euro back-end prototype for online payments, called N€XT, is a bespoke design developed from scratch by the Eurosystem. The architecture of N€XT is not that of a distributed ledger, rather it is based on a UTXO data model which has been made popular by distributed ledger technologies (DLTs).” (EZB, 2023b, p. 5) 18 - a parallel settlement scheme for D€ settlements (N€XT) as TARGET2 is reserved for the settlement between banks. While the ECB has never presented an estimate of the costs for establishing and operating such a parallel payment universe, it seems likely that it will be more expensive than a solution based on existing structures. The multiplication of settlement transactions is also difficult to reconcile with the ECB’s commitment to sustainability which Vice-President Guindos (2023) has stated as follows: “Looking to the future, we will continue to honour our commitments to stepping up our sustainability and climate protection efforts.” 3.3.2 The acceptance of the D€ payment scheme The parallel structures of the D€ payment scheme are not only very expensive they might also jeopardize the acceptance by the public and thus reduce its competitiveness relative to US payment platforms. The main impediment is the need to open an additional bank account which is not required for the use of credit card schemes or e.g. PayPal. In addition, for many people the logic of the waterfall functionalities and the lack of an overdraft facility will not be obvious. A major disadvantage of the D€ scheme compared with other payment platforms is its limitation on accounts denominated in euro. This reduces its regional scope to the euro area so that even Europe is not completely covered by this payment scheme. Thus, it is not correct if the ECB praises the D€ as a “pan-European payment solution”. For the competition with other platforms, one has to consider that they offer not only the pure payment transaction but also related services, above all consumer loans (without interest in the short-term) and consumer protection in online purchases. Some platforms also offer financing and marketing services for merchants. Commercial banks play a crucial role in the acceptance of the D€ scheme, as they are the only institution that communicates directly with potential D€ users. As Ozcan and Gurses (2019) show, an important precondition for the creation of new markets is the cooperation between the dominant players (“dyadic alliances”). This is especially important, if the “new market requires complementary resources from different kinds of large firms or large firms from different industries”. In this case, the authors also mention the “Difficulty in reaching an agreement due to diverging plans for the new market (…) and beliefs about relative bargaining power.” According to the ECB’s design for the D€, commercial banks are obliged to open and to manage D€ accounts free of charge. In addition, if a customer decides to transfer deposits from its commercial bank account to a D€ account, the bank suffers a loss of cheap refinancing which it has to substitute by more costly refinancing sources. While the acceptance among merchants might be supported by lower fees, it is unlikely that they 19 would stop accepting the established payment schemes. Therefore, on the side of the customers there would be no incentive to switch to the D€. Representatives of the Eurosystem also do not seem to be convinced of the acceptance of the D€ scheme. They therefore envisage enforcing the opening of D€ accounts by making public payments on D€ accounts only. E.g. Burkhard Balz (2024), member of the Bundesbank executive board, at the public hearing of the Finanzausschuss of the German Parliament on 9 February 2024 made the following statement: “The specific use case, as we call it, is payments from government agencies directly to people via the digital euro wallet or vice versa.” (our translation). And: “For me, use cases also include, for example, being able to pay child benefit directly and other state benefits.” (our translation) One could argue that in the past it had not been possible to make direct payments from the government to its citizens, e.g. during the energy crises. But in Germany, the institutional framework has been changed by linking the tax number with the IBAN number so that it is now possible to make such direct payments. 20 Overall, forcing people to open D€ accounts would have a negative impact on the public perception of European integration. Already today, many people have the impression that the EU is involving to much in areas which go beyond its competencies. In addition, as the experience with the Digital Yuan shows, people who receive such payments seem to transfer the funds immediately to their commercial bank account.21 3.3.3 The dominance of the ECB in the European retail payment system According to the rule book (ECB 2024a), the Digital Euro Service Platform (DESP) would become the key player in the D€ payment scheme. As Chart 5 shows, this institution would provide the link between the bank of the payer and the bank of the payee. The rulebook (ECB 2024a) describes e.g. the case of a payment which is initiated by the payer as follows: “1. The payer presents the amount to be paid to the payee. 2. The payee verifies the amount, consents and taps to accept the payment. 3. The payer receives the payee’s consent and submits the payment request to its intermediary. 20https://www.bundesfinanzministerium.de/Content/DE/Standardartikel/Themen/Steuern/Weitere_Steuerthemen/Organisation_Automation/2023-12-11meldung-iban-bzst.html 21https://www.coindesk.com/policy/2024/05/13/chinas-digital-yuan-isnt-taking-off-despite-state-employee-salary-trial-report/ 26 D€ as a payment scheme The ECB argues on the macroeconomic level that the D€ is needed as a monetary anchor in an increasingly digital financial system. But one can show that this is not an externality that could justify a fundamental change in the division of labor between the central bank and commercial banks. The microeconomic argument that holding D€ deposits provides the “benefits of central bank” is also not convincing. With an effective deposit insurance bank deposits are as safe as central bank money. But for households the need to hold parallel accounts would lead to additional transactions and information costs. With zero interest and the possibility to use the D€ payment scheme with zero balances the use case for holding deposits on D€ accounts is not clear. The offline use of the D€ requires a positive balance on a wallet or a card. But the use cases for this functionality are limited and it is unclear whether it would be very userfriendly. D€ as a payment scheme In the case of payment schemes, the ECB argues that the D€ is required for the sake of the “strategic autonomy of the Union’s payment ecosystem”. While this is a clear externality, one must ask whether the creation of completely new D€ payment scheme is the optimum solution. According to the rule book, the ECB is planning to establish a comprehensive pan-European payment scheme which is reserved for transactions between D€ accounts. This requires high costs for creating and maintaining the D€ infrastructure. It might impair the attractiveness of the scheme as, in contrast to other payment schemes, it requires opening a new bank account. In addition, the scheme would duplicate the existing SEPA scheme which is open for all kinds of bank accounts. If the ECB sticks to its D€ project, which is likely after its strong efforts so far, from the analysis of this paper two scenarios can be derived. A worst case scenario: In the worst-case scenario, the D€ project becomes a complete failure. Most households would not open a D€ account and those who would open it, would only keep very low balances on it. Due to the lack of participants, the D€ payment scheme would not reach a sufficient coverage among merchants so that it would also not attractive for payment service providers to connect with the scheme. Due to its technical complexity the offline D€ would also not be used in a significant way. With this outcome, the reputation of the ECB would receive a serious blow as it would need to justify the huge investment costs for parallel infrastructures that remain widely unused. 27 A positive, but inefficient scenario: In a positive scenario, most households open a D€ account. But they make full use of the waterfall functionalities and do not hold any significant balances on their D€ accounts. A payment service provider can be found that supplies a common payment instrument, which is widely used by households and merchants. A large share of retail transactions is made with the D€ payment scheme and the dominance of US platforms is reduced. In this scenario, the D€ system would de facto provide an indirect payment infrastructure for commercial bank accounts. As already mentioned, such a scheme would, compared with current infrastructures, lead to a tripling of payment transactions which is difficult to reconcile with the ECB’s attempts to “supporting an orderly transition to a climate-neutral economy”, and to recognize “the importance of continuing to drive positive change by reducing its own impact on the environment.” Thus, in such a scenario the D€ would ultimately provide a complex detour solution for payments between commercial bank accounts. It would be a costly substitute for the direct solution of reducing dependence on non-European payment platforms via a SEPA for cards. In addition to the complexity and the costs, the dominant role of the ECB in such a scheme could have negative effects on innovation and user-friendliness with the effect that the DE scheme cannot successfully compete with the dominant international platforms. A convincing use case for the offline D€ is difficult to imagine, even in a positive scenario. 6 The international perspective: a sobering picture Our critical assessment of the D€ is supported by an international perspective. In the Annex 1 we show that none of the existing CBDC projects have not been able to gain a significant market share although the authorities tried to support their usage. So far there is not a single CBDC success story. In Annex 2, we provide our own “CBDC Tracker” which gives a comprehensive overview of the assessment of CBDC by the central banks in the major OECD countries. The result is striking: In contrast to reports that more and more countries are engaging in CBDC projects, most central banks have a rather sceptical attitude towards the necessity of a retail CBDC. This finding is supported by the recent BIS survey (BIS 2024), which shows that the number of central banks which are planning to introduce a retail CBDC in the medium term is declining. 28 Chart 7: Likelihood of issuing a CBDC in the foreseeable future (As a percentage of respondents that have not issued a CBDC) Source: BIS (2024) The absolute number of central banks that are planning to introduce a retail CBDC within the next few years has declined from 11 to six. Thus, the increasing engagement of central banks in CBDC seems to have led to a certain disillusionment. 7 Summary: Beware of taking off too early Even though the number of central banks dealing with CBDC is still increasing, this should not lead to the impression that we are now on the verge of a breakthrough in this innovation. The projects implemented so far are anything but success stories. The majority of large and major central banks have a sceptical and often negative attitude towards CBDC. Against this backdrop, the ECB is taking a major risk with its unconditional commitment to the Digital euro. Even under optimistic assumptions, it is difficult to imagine developments in which the ECB's objectives can be achieved in an efficient manner. It is difficult to understand why the ECB insists on developing a completely new parallel universe instead of attempting to integrate the existing and efficient systems in such a way that a solution can be developed that can compete effectively with the US platforms. Given the large financial and intangible investments that the ECB has already made in this project, it is unlikely to be politically possible for it to get off the train again. This should serve as a warning to central banks that have so far been cautious about CBDCs not to jump on such a bandwagon too soon. 29 References Atlantic Council (2024), Central Bank Digital Currency Tracker, Internet: https://www.atlanticcouncil.org/cbdctracker Balz, B. (2024): Statement beim Hearing des Finanzausschusses am 19. Februar 2024 zum Digitalen Euro. Internet: https://www.bundestag.de/resource/blob/995074/5f84dba6427542fda28d3cb5439b3854/Protokoll.pdf Bank for International Settlements (2024), Embracing diversity, advancing together – results of the 2023 BIS survey on central bank digital currencies and crypto, by Alberto Di Iorio, Anneke Kosse and Ilaria Mattei. BIS Papers 147, June 2024. Internet: https://www.bis.org/publ/bppdf/bispap147.htm Bank for International Settlements Committee on Payments and Market Infrastructures (2016), Glossary, https://www.bis.org/cpmi/publ/d00b.htm?m=114 Banque de France (2018), "Payments and market infrastructures in the digital era", Chapter 2, Means of payment and payment instruments, Internet: https://www.banquefrance.fr/en/publications-and-statistics/publications/book-payments-and-market-infrastructures-digital-era Beau, D. (2023), Money and payments in the digital age, Speech Université Bretagne Sud, 10 November 2023, Internet: https://www.banque-france.fr/en/governors-interventions/money-and-payments-digital-age Berlin Group (2024), Reconciliation and Settlement of Card Payments via Instant Payments and Premium Payment APIs, A White Paper as an Introduction to the Topic. Internet: https://www.berlin-group.org/_files/ugd/c2914b_d96e8032913e40878604a5a3720d27bd.pdf Bidder, R., Jackson, T. and M. Rottner (2024). BDC and banks: Disintermediating fast and slow, Discussion Paper Deutsche Bundesbank, No 15/2024. Internet: https://www.bundesbank.de/resource/blob/931090/be2be8b2c5324245e4147d6306689312/mL/202404-29-dkp-15-data.pdf Bofinger, P. and T, Haas (2023a), The Digital Euro (CBDC) as a Monetary Anchor of the Financial System, SUERF Policy Note, Issue No 309, April 2023. Internet: https://www.suerf.org/wp-content/uploads/2023/12/f_39cbf7bd666de7d755c556b218a29054_65263_suerf.pdf Bofinger, P. and T. Haas (2023b), The Digital Euro: Benefits, Costs and Risks, Expert opinion commissioned by the Bank and Insurance Division of the Austrian Economic Chambers, University Würzburg, July 2023. Internet: https://www.wiwi.uni-wuerzburg.de/vwl1/aktuelles/single/news/gutachten-und-pressekonferenz-zum-digitaleneuro 30 Brunnermeier, M. K., James, H., und Landau, J.-P. (2019). The Digitalization of Money. NBER, Working Paper Series, No. 26300. Internet: https://www.nber.org/papers/w26300 Brunnermeier (2024), Statement beim Hearing des Finanzausschusses am 19. Februar 2024 zum Digitalen Euro. Internet: https://www.bundestag.de/resource/blob/995074/5f84dba6427542fda28d3cb5439b3854/Protokoll.pdf Cipilone, P. (2024), Feedback on commitments offered by Apple over access restrictions to near-field communication technologies, Letter from 19 April 2024. Internet: https://www.ecb.europa.eu/pub/pdf/other/ecb.letter240419_Breton~fe4828c691.en.pdf De Guindos, L. (2023), Foreword, 2023 update of the ECB’s Environmental Statement. Internet: https://www.ecb.europa.eu/ecb/climate/green/pdf/ecb.environmentalstatement202307~59d31f2afe.en.pdf Deutsche Bundesbank, The Eurosystem cash strategy and the role of cash, Internet: https://www.bundesbank.de/en/tasks/cash-management/the-eurosystem-cash-strategy/the-eurosystem-cash-strategy-and-the-role-of-cash-859166 ECB (2019), Card payments in Europe: Current landscape and future prospects: a Eurosystem perspective, April 2019. Internet: https://www.ecb.europa.eu/pub/pdf/other/ecb.cardpaymentsineu_currentlandscapeandfutureprospects201904~30d4de2fc4.en.pdf ECB (2021), Eurosystem oversight framework for electronic payment instruments, schemes and arrangements, November 2021, Internet: https://www.ecb.europa.eu/paym/pdf/consultations/ecb.PISApublicconsultation202111_1.en.pdf ECB (2023a), Opinion of the European Central Bank of 31 October 2023 on the digital euro, (CON/2023/34), Official Journal of the European Union, Internet: https://eurlex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52023AB0034 ECB (2023b), A stocktake on the digital euro, 18 October 2023, Internet: https://www.ecb.europa.eu/euro/digital_euro/timeline/profuse/shared/pdf//ecb.dedocs231018.en.pdf ECB (2024a), Update on the work of the digital euro scheme’s Rulebook Development Group, 3 January 2024, Internet: https://www.ecb.europa.eu/euro/digital_euro/timeline/profuse/shared/pdf/ecb.degov240103_RDG_digital_euro_schemes_update.en.pdf ECB (2024b), Progress on the preparation phase of a digital euro: First progress report, 24 June 2024, Internet: https://www.ecb.europa.eu/euro/digital_euro/progress/shared/pdf/ecb.deprp202406.en.pdf 31 European Commission (2023), Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the establishment of the digital euro. Brussels, 28.6.2023, COM(2023) 369 final. Internet: https://eur-lex.europa.eu/resource.html?uri=cellar:6f2f669f-1686-11ee-806b-01aa75ed71a1.0001.02/DOC_1&format=PDF European Payments Initiative (2024), Statement beim Hearing des Finanzausschusses am 19. Februar 2024 zum Digitalen Euro. Internet: https://www.bundestag.de/resource/blob/995074/5f84dba6427542fda28d3cb5439b3854/Protokoll.pdf Kantar Public (2023), Study on Digital Wallet Features, March 2023. Internet: https://www.ecb.europa.eu/press/pr/date/2023/html/ecb.pr230424_1_annex~93abdb80da.it.pdf Ozcan, P. and K. Gurses (2019), Collaborative Market Making: The Critical Role of Dyadic and Multipartner Alliances in the Formation of New Markets, in. The Oxford Handbook of Entrepreneurship and Collaboration, Edited by Jeffrey J. Reuer, Sharon F. Matusik, and Jessica Jones, Internet: http://pinarozcan.com/wp-content/uploads/2020/10/oxfordhb9780190633899-e-23.pdf Panetta, Fabio (2022a), Public money for the digital era: towards a digital euro; Speech Dublin, 16 May 2022. Internet: https://www.ecb.europa.eu/press/key/date/2022/html/ecb.sp220516~454821f0e3.en.html Panetta, F. (2022b), Demystifying wholesale central bank digital currency, Speech Frankfurt am Main, 26 September 2022. Internet: https://www.ecb.europa.eu/press/key/date/2022/html/ecb.sp220926~5f9b85685a.en.html Sveriges Riksbank (2023), E-krona report, E-krona pilot, phase 3, April 2023. Internet: https://www.riksbank.se/en-gb/payments--cash/e-krona/e-krona-reports/e-krona-pilotphase-3/ Sveriges Riksbank (2024), E-krona report, E-krona pilot, phase 4, March 2024. Internet: https://www.riksbank.se/globalassets/media/rapporter/e-krona/2024/e-krona-pilotphase-4.pdf 32 Annex: A CBDC tracker based on central bank statements and experiences I. Countries which have implemented or plan introducing CDBC Bahamas China Eastern Caribbean Currency Union (ECCU) India Jamaica Mexico (planned) Nigeria II. Countries with a sceptic view of CBDC (advanced economies, Brazil, Chile, Indonesia, Malaysia, Kenya, Philippines) Australia Brazil Canada Chile Czech Republic Denmark Hong Kong SAR Iceland Indonesia Israel Japan Korea Malaysia New Zealand Norway Philippines Singapore Sweden Switzerland Thailan Taiwan United Kingdom United States 33 Part I: Countries which have started a CBDC project or announced the start of a CBDC project In the following, we present evidence from newspapers and online reports, as it not possible to find sufficient information the issuance of CBDC on central bank websites. The links to the sources are provided within the text. Bahamas Sand Dollar only 0.19 % of the total currency in circulation “About one year after the Sand Dollar went nationwide (October 20, 2020), Sand Dollar circulation reached around B$300,000; however, adoption was relatively flat for the following year. In May 2023, the Sand Dollar had about 104,664 consumer wallets and around 1,500 merchant wallets (CBOB 2023). After a series of Sand Dollar educational campaigns, promotions, and giveaways—as well as the integration of the rCBDC with government payments and the ACH system—circulation rose by about B$1 million, reaching B$1,099,910 by September 2023 (Branch, Ward, and Wright 2023). Still, this value amounts to only 0.19 percent of the total currency in circulation at the time.” Source: Franklin Nol, Observations from the Retail CBDCs of the Caribbean, Federal Reserve Bank of Kansas City, 10 April 2024. https://www.kansascityfed.org/Payments%20Systems%20Research%20Briefings/documents/10104/PaymentsSystemResearchBriefing24Noll0410.pdf China e-Yuan only 0.16 % of the China’s M0 (Reuters 19 July 2023) Transactions using China's digital yuan hit 1.8 trillion yuan ($249.33 billion) at end-June, the country's central bank governor Yi Gang said on Wednesday, marking a jump from over 100 billion yuan as of August last year. The numbers cement China's role as a leader among countries that are developing their own central bank digital currencies (CBDC) - digital tokens issued by central banks - although adoption is still in the early stages. The e-CNY, as the digital yuan is called, has so far been used mainly for domestic retail payments. Speaking at a lecture organised by the Monetary Authority of Singapore (MAS) in the Southeast Asian city-state, Yi said China's digital currency in circulation reached 16.5 billion yuan as of end-June. Total e-CNY transactions reached 950 million, with 120 million wallets being opened, Yi said. Still, e-CNY in circulation accounted for only 0.16% of China's M0 money supply, or cash in circulation, Yi said. 34 "And you can see that right now the balance of e-CNY is only counting two-tenths of 1% of M0, so that the balance is very small, but with this kind of balance (we) support a big number of transactions, which means that the velocity is high and more efficient," Yi said. Chinese state-owned banks participated last year in a trial focused on cross-border transactions developed by the Bank of International Settlements. Source: https://www.reuters.com/markets/asia/chinas-digital-yuan-transactions-seeing-strong-momentum-says-cbank-gov-yi-2023-07-19/ China is paying some workers in digital yuan – but few are choosing to use it (South Chinese Morning Post 13 May 2024) China's digital yuan, also known as e-CNY, is failing to catch on during a trial in which state employees receive their salary in the central bank digital currency (CBDC), according to a report by the South China Morning Post (SCMP). Most of the early recipients immediately transfer the digital yuan balances to their bank accounts to spend as cash, the SCMP reported. “I prefer not to keep the money in the e-CNY app, because there’s no interest if I leave it there,” Sammy Lin, one participant in the pilot, said. “There are also not so many places, online or offline, where I can use the e-yuan Source: https://www.scmp.com/economy/china-economy/article/3262194/china-paying-some-workersdigital-yuan-few-are-choosing-use-it Eastern Caribbean Currency Union (ECCU) DCash only 0.16 % of total currency in circulation Less than nine months after the start of the DCash pilot in 2021, the DCash platform went down for close to 10 weeks; when service was restored, around 4,000 wallet holders, roughly 20 financial institutions, and 10 government agencies across the ECCU were participating in the pilot. Later, DCash educational campaigns expanded and included inperson demonstrations. By March 2023, 400 merchants were participating. Overall, DCash circulation appears to have grown modestly from its initial issuance of EC$2 million to EC$2.45 million in March 2023 (ECCB 2022, 2023). This amount is still very small, accounting for only 0.16 percent of the total currency in circulation at the time. Source: Franklin Nol, Observations from the Retail CBDCs of the Caribbean, Federal Reserve Bank of Kansas City, 10 April 2024 https://www.kansascityfed.org/Payments%20Systems%20Research%20Briefings/documents/10104/PaymentsSystemResearchBriefing24Noll0410.pdf 35 India E-rupee: “Litte organic demand” (Reuters 25 June 2024) Usage of India's digital currency, the e-rupee, has slumped to just a tenth of the peak hit in December, four sources said, reflecting the struggles several countries have experienced in trying to generate public support for digital currencies. The Reserve Bank of India started a pilot for the e-rupee, devised as a digital alternative to physical cash, in December 2022, and successfully reached a target of 1 million retail transactions per day by December 2023. The achievement came only after banks were asked to push up transactions by offering incentives to retail users and disbursing a portion of bank employees' salaries using the e-rupee. But now that the push has diminished, daily transaction numbers have fallen to about 100,000, said two of the sources, who are directly involved in the pilot. This shows there is little organic demand to use the e-rupee, said a third source, a banker involved in the project. The sources declined to be identified because they are not allowed to speak to media. The RBI did not respond to an email seeking comment and the data on retail transactions via the e-rupee is not publicly disclosed. The transactions that are continuing are in part due to banks disbursing benefits to their employees via the e-rupee, all four of the sources said. This has helped to push up transactions to about 250,000 to 300,000 per day towards the end of each month, the two sources cited earlier said Source: https://www.reuters.com/technology/india-digital-currency-transactions-slump-after-reachinginitial-cbank-target-2024-06-25/ Inaugural Address by Shri Shaktikanta Das, Governor, Reserve Bank of India on August 26, 2024 “It is important to emphasise that there should not be in any rush to roll out system-wide CBDC before one acquires a comprehensive understanding of its impact on users.” Source: https://www.bis.org/review/r240828p.htm Jamaica JAM-DEX roughly 0.11 percent of total currency JAM-DEX launched on July 11, 2022; by the end of the month, around 120,000 individuals and 2,300 merchants were reportedly on the JAM-DEX network via the Lynk platform. The 42 holder provided in the form of electronic data. This intangible feature is a crucial point in considering the differences between CBDC and cash. Whether to issue a retail CBDC in Japan should be decided by discussions among the public. (…) the sharing of roles between central bank money and private money as well as private firms' capacity for resource allocation and innovation should also be valued. Source: https://www.bis.org/review/r240306a.htm Kenya Central Bank of Keyna: Discussion Paper on Digital Currency (February 2022) As is with mobile money, the focus of the assessment of CBDC innovation must be on functionality and the problem it resolves for the people rather than the underlying technology. Whilst CBDC offers opportunities to reduce costs associated with digital payments, it also comes with risks particularly related to cybersecurity and unknowns on how it would impact central banks’ core functions of monetary policy, financial stability and payment systems oversight. Further, in the case of Kenya where electronic money has taken root, the proposed value solution offered by CBDC seems to be already met. Source: https://www.centralbank.go.ke/uploads/discussion_papers/CentralBankDigitalCurrency.pdf Central Bank of Keyna: Discussion Paper on Central Bank Digital Currency: Comments from the Public (May 2023) Ultimately, the rollout of CBDC should not be a race to be first. CBK’s vision is for a payments system that is secure, efficient, and widely available to and works for Kenyans. Presently, Kenya’s pain points in payments can potentially be solved by strengthening innovations around the existing payment ecosystem. Accordingly, implementation of a CBDC may not be a priority in Kenya in the short to medium term. However, CBK will continue to monitor developments in the CBDC world and periodically assess the need for CBDC in Kenya. Source: https://www.centralbank.go.ke/wp-content/uploads/2023/06/Discussion-Paper-on-CentralBank-Digital-Currency-Comments-from-the-Public.pdf Korea Ledger Insights: Korean wholesale CBDC pilot to support tokenized deposits (4 October 2023) Today the Bank of Korea (BoK) announced plans for a wholesale central bank digital currency (wholesale CBDC) pilot in conjunction with the Bank for International Settlements 43 (BIS). Key motivations for the Korean wholesale CBDC include acting as a settlement asset for commercial bank tokenized deposits, and exploring the BIS’ Unified Ledger concept. The central bank previously ran retail CBDC trials but has concluded there is no current need for a retail CBDC, given the efficient payments landscape. However, it will continue to explore technology for an offline CBDC and privacy preserving technologies.23 Source: https://www.ledgerinsights.com/korean-wholesale-cbdc-pilot-to-support-tokenized-depositsunified-ledger/ Malaysia Bank Negara Malaysia (Central Bank Malaysia): Annual Report 2020 At the moment, the Bank does not have any immediate plans to issue CBDC. In Malaysia, the financial system continues to support the functioning of the economy while meeting the needs of individuals and businesses. To this end, the existing monetary and financial policy tools have remained effective in safeguarding monetary and financial stability. Moreover, domestic payment systems, including the RPP continue to operate safely and efficiently to support the needs of the economy and allow real-time digital payments. Source: https://www.bnm.gov.my/documents/20124/3026128/ar2020_en_box2_digitalcurrency.pdf Malaysia Financial Sector Blueprint 2022-26 - A Booster For Digital Finance (NEW STRAITS TIMES, 24 Februar 2022) To catch up with the popularity of the Central Bank Digital Currency (CBDC), BNM will intensify research and experimentation on the use of CBDC for Malaysia's monetary and financial infrastructures with the initial focus on wholesale CBDC, making it clear that retail CBDC is not on the radar of the central bank. CBDC will also be handy in exploring emerging payment innovations for cross-border payments, such as the use of multiCBDC arrangements” Source: https://www.kkd.gov.my/dasar-privasi/233-kkd-news/21482-malaysia-financial-sector-blueprint2022-26-a-booster-for-digital-finance 44 New Zealand Reserve Bank New Zealand: Digital Cash in New Zealand (17 April 2024) At the Reserve Bank - Te Pūtea Matua, we're looking at digital cash. It would be an electronic version of cash, issued by the Reserve Bank of New Zealand, but it would not replace cash. We are in stage 2 of a multi-year, multi-stage process of considering digital cash. We've developed some principles and design options for New Zealand’s digital cash, and we want you to tell us if we have got it right and what it would mean for you. There are many details to work out before we can decide if digital cash is right for New Zealand, and we plan to consult again in the future on whether we should go ahead and issue digital cash. Source: https://consultations.rbnz.govt.nz/money-and-cash/digital-cash-in-new-zealand/?_gl=1*dmmbrz*_ga*MjAyOTcxNzk5OS4xNzE5NTkxODA3*_ga_51JCWD9FGD*MTcxOTU5MjU3MS4xLjEuMTcxOTU5MjYwMC4wLjAuMA..#documents Norway Norges Bank Papers: Central bank digital currency - final report for project Phase 4 In summary, our assessment so far is that with respect to the precautionary approach, introducing retail CBDC is not a very urgent matter. The idea that the introduction of retail CBDC is the most adequate instrument for managing risks in Norges Bank's areas of responsibility associated with new monetary and payment systems is uncertain as well. Nevertheless, we cannot exclude the possibility that highly secured stablecoins in foreign currency issued by, for example, bigtechs, or CBDC from countries with significant economic relations to Norway, may be used by Norwegian audiences to a certain extent. Norges Bank should therefore pursue its assessment of how to ensure that payments in NOK offer required functionality demanded by end users in the future. Retail CBDC, wholesale CBDC, other changes in the settlement system and regulatory instruments are all relevant in such an assessment. Source: https://www.norges-bank.no/contentassets/fb85d452791d4d1a9f04aa4d3c18683d/norgesbank-papers-2---phase-4---final-report.pdf?v=18122023133556 Philippines Jan Marlon A. Evangelista, Bank Ofiicer, Payments Policy and Development Department Payments and Currency Management Sector (25 April 2024) There is minimal perceived added value for the use of retail CBDC in the Philippines given the progress in the implementation of retail payment and financial inclusion reforms. 45 Account-based CBDCs may not yield much value compared to current retail payment instruments in the Philippines. Source: https://www.bsp.gov.ph/Inclusive%20Finance/EFLP/EFLP2024_1_2c.pdf Poland NPB Management Board (May 2021) The NBP Management Board has adopted the following stance of Narodowy Bank Polski on the issuance of digital zloty: For many years Narodowy Bank Polski has been closely monitoring the progress of the work of other central banks on the issue of a new form of currency, i.e., central bank digital currency (CBDC), and it has been evaluating the needs of the Polish market in this respect. At the same time, NBP has been thoroughly examining the potential implications of CBDC issuance – its legal, technological and economic consequences (particularly, for the functioning of the banking sector, financial stability, monetary policy, and the operation of the payment system). The current circumstances in Poland do not justify the rationale behind the launching of the pilot tests on CBDC issuance or digital currency implementation by other central banks. Until now NBP has not identified a systemic objective for the issuance of digital zloty or any specific needs of consumers or business entities that could not be satisfied by payment service providers in Poland but only through the central bank through the introduction of CBDC. The results of the analyzes conducted show no clear benefits from the introduction of central bank digital currency in Poland versus the identified risks related to its issuance for the economy, cash circulation and the financial system. NBP takes a prudent approach to the possibility of introducing digital zloty and does not currently choose to issue it, in the absence of any convincing justification. NBP’s current stance on the issuance of CBDC may be modified should factors (domestic or international) justifying such a change emerge. Source: https://nbp.pl/en/payment-system/statistical-data/analyzes-and-studies/central-bank-digitalcurrency/ Singapore Monetary Authority of Singapore: A Retail Central Bank Digital Currency: Economic Considerations in the Singapore Context (November 2021) “Overall, MAS’ current view is that there is no pressing need for a retail CBDC in Singapore at this point in time. Demand for cash domestically remains some way from the 46 “minimum threshold” where concerns of the negative implications from the lack of cash in circulation might arise. MAS’ decision to proceed with further technological and policy explorations of a retail CBDC should not be taken as a commitment to its issuance. There are broader considerations for CBDC issuance, such as whether the public expects direct access to central bank money as part of the social contract in Singapore. At the same time, while there is general consensus that money and payments are public goods whose provision should not be left entirely to the private sector, the appropriate “division of labour” between the public and private sector ultimately also involves some normative judgement. Source: https://www.mas.gov.sg/-/media/MAS/EPG/Monographs-or-Information-Paper/A-retail-CBDC--- Economic-Considerations-in-the-Singapore-Context.pdf Sweden The state and the payments: Summary of the report of Betalningsutredningen, Stockholm 2023 The Inquiry therefore does not currently see sufficiently strong societal needs for the Riksbank to issue an e-krona. Given that development is occurring rapidly, economic, political and technological changes may prompt a new assessment. Source: https://www.regeringen.se/contentassets/c01377cf65424cf0b12addf64c04374a/english-summary-the-state-and-the-payments.pdf Sveriges Riksbank: E-krona – state money in digital form Whether or not to introduce an e-krona in Sweden is ultimately a political decision. An inquiry into the role of the state in the payment market, presented in March 2023, assesses that there is currently insufficient social need for the Riksbank to issue an e-krona. However, global changes may lead to a different assessment in the future. In its consultation response, the Riksbank points out that work on developing legislation for a possible e-krona needs to begin now, so as to shorten the implementation period if the launch of an e-krona becomes relevant later. Source: https://www.riksbank.se/en-gb/payments--cash/e-krona Switzerland Speech by Thomas J. Jordan: Towards the future monetary system. Introductory remarks, event 'Towards the future monetary system', Zurich (8 April 2024) Some central banks are also exploring the issuance of a digital form of cash as a retail payment instrument. The SNB currently sees no need in Switzerland for such digital central bank money for the general public, also known as retail CBDC. Consumers and 47 businesses already have access to a wide range of efficient and innovative payment instruments offered by the private sector. Retail CBDC could fundamentally alter the current monetary system and the role of central banks and commercial banks, with farreaching consequences for the financial system. From a Swiss perspective, the risks of retail CBDC currently outweigh its potential benefits. Source: https://www.snb.ch/en/publications/communication/speeches/2024/ref_20240408_tjn Taiwan Central bank Deputy Governor Chu Mei-lie (Taipeh Times, 8 December 2023) Taiwan’s central bank is prudently approaching the issue and has no timetable on when to reach a conclusion, she said. Source: https://www.taipeitimes.com/News/biz/archives/2023/12/08/2003810290 Taiwan c.bank says no timetable for launching digital currency (Reuters 7 July 2024) Taiwan's central bank said on Sunday that it has no timetable for launching a digital currency, warning the process will be "huge and complex", but it will hold public hearings on the matter next year to spread knowledge. Source: https://www.reuters.com/world/asia-pacific/taiwan-cbank-says-no-timetable-launching-digitalcurrency-2024-07-07/ Thailand Bank of Thailand: Pilot Program, Retail CBDC Conclusion Report (March 2024) In a nutshell, the BOT envisions that CBDC can foster competition among FSPs, enable new financial innovations, and make more capable and cost-efficient services available to the public in the future. Nonetheless, challenges associated with Retail CBDC remain such as user adoption, as well as its consequences on the business models of FSPs. Meanwhile, the value-added benefits of CBDC remain unclear to many central banks, leading them to designate their respective CBDC plans as long-term endeavors. At present, the BOT has no immediate plan to officially issue Retail CBDC, but the BOT will use the results from the pilot, especially insights related to the technology design, to apply to new areas and future studies on enhancing the payment system. Source: https://www.bot.or.th/content/dam/bot/documents/en/financial-innovation/cbdc-digital-currency/rCBDC%20Conclusion%20Report.pdf 48 United Kingdom Treasury Committee, Oral evidence: Bank of England Financial Stability Reports, HC 140, Monday 16 January 2023 Andrew Bailey (Governor at the Bank of England): “I am not convinced about some of the problems that we might be trying to solve. I am not necessarily convinced that the retail payment systems need this sort of upgrade at the moment. Frankly, I am still thinking hard about this, and the thing that I come back to is that if there is a demand for retail digital money—if there is a demand for stablecoins—and we must set the standard very high because of the need for certainty of value of stablecoins, is it actually different from a central bank digital currency? Should we make that distinction, or not? It remains to me an open question. From the Bank of England's point of view, our main motivation for a retail CBDC would be to promote the singleness of money by ensuring that the public always has the option of going into fully functional central bank money that can be used in their everyday lives. We have set out a number of arguments for why this might be needed in our consultation paper. But we do not yet know if we'll definitely need to do it – this will depend on how trends in money and payments play out. Source: https://committees.parliament.uk/oralevidence/12520/pdf House of Commons Treasury Committee: The digital pound: still a solution in search of a problem? First Report of Session 2023–24 58. T here are some potential benefits to the UK economy from a digital pound. A digital pound could help support innovation in domestic payments, while guarding against some of the risks posed by new forms of private digital money by maintaining public access to a form of central bank money. Innovation brought about by a digital pound could also support the UK’s international competitiveness in payments (and related) technologies, particularly if it is amongst the first major central banks to issue a retail CBDC. The extent of these benefits is unclear, however. Nor is it yet clear that a digital pound is the only (or best) means of achieving them. 60. Building the infrastructure needed for a digital pound would also likely be very expensive, and the eventual decision on whether to launch a digital pound will need to be subject to a rigorous cost-benefit analysis. The Bank of England and Treasury must approach this analysis from a neutral stance—the launch of a digital pound must not be viewed as an inevitable consequence of investing in further detailed design work. The policy question must remain ‘why do it’ rather than becoming one of ‘why not do it’. Source: https://committees.parliament.uk/oralevidence/12520/pdf/ 49 United States On the website of the Board of Governors of the Federal System: Has the Federal Reserve decided to create a CBDC? The Federal Reserve issued Money and Payments: The U.S. Dollar in the Age of Digital Transformation as a first step in fostering a broad and transparent public dialogue about CBDCs in general, and about the potential benefits and risks of a U.S. CBDC. The paper is not intended to advance any specific policy outcome and no decisions have been made at this time. The Federal Reserve has made no decision on issuing a central bank digital currency (CBDC) and would only proceed with the issuance of a CBDC with an authorizing law. Testifying before the House Financial Services Committee in March 2023, Chair Powell said a central bank digital currency is, “something we would certainly need Congressional approval for.” Source: https://www.federalreserve.gov/cbdc-faqs.htm Jerome Powell testifiying before Congress on March 7 2024 (Reuters) Federal Reserve Chairman Jerome Powell significantly downplayed the possibility of the central bank issuing its own digital currency, and said if it ever came to pass, the government would play a limited role. Testifying before Congress Thursday, Powell said policymakers were "nowhere near" taking action on adopting such a tool. “People don’t need to worry about a central bank digital currency, nothing like that is remotely close to happening anytime soon," he told the Senate Banking Committee. He added that the Fed has no interest in establishing accounts for individuals that would compete with the banking system, and it would not support any Fed monitoring of personal financial transactions. "If we were to ever do something like this, and we’re a very long way from even thinking about it, we would do this through the banking system, the last thing...we the Federal Reserve would want would be to have individual accounts for all Americans," he said. Source:https://www.reuters.com/markets/us/powell-says-fed-not-remotely-close-central-bank-digitalcurrency-2024-03-07/ i Imprint Publisher Macroeconomic Policy Institute (IMK) of Hans-Böckler-Foundation, Georg-Glock-Str. 18, 40474 Düsseldorf, Germany, phone +49 211 7778-312, email [email protected] IMK Study is an irregular online publication series available at: https://www.imk-boeckler.de/de/imk-studies-15380.htm The views expressed in this paper do not necessarily reflect those of the IMK or the Hans-Böckler-Foundation. 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