We are the guardians of the euro, and the euro belongs to Europeans. If necessary, we should be ready to issue a digital version of the euro. These were the words last Oct that Christine Laggard, President of the European Central Bank (ECB), expressed her vision for the Euro tower regarding the possibility of issuing a digital euro. What is it? This analysis will introduce central bank digital currencies. It will outline their general characteristics as well as those that are unique to cryptocurrencies. This analysis also includes an overview of recent developments by major central banks as well as the main risks and opportunities associated with these instruments.
The declining use of cash has been a result of increasing digitalization in the payment system over the past 20 years (Easylink & Hernandez, 2017). This is evident in the fact that electronic payments have grown from 13% to 25% in 2000 for countries in the Committee on Payments and Market Infrastructures, to 25% in 2016. This trend has been accelerated by travel restrictions imposed in the aftermath of the pandemic. Alternative forms of money like cryptocurrencies and stable coins have emerged in this situation. They are taking a growing market share to the detriment traditional money forms.
As guarantors for monetary stability, central banks are now considering issuing their own digital legal tender currencies, the Central Bank Digit Currencies (CBDC). Meaning (2018) gives the most complete definition of CBDC. A central bank can issue its own digital legal tender currency, the so-called me>Central Bank Digital Currencies (CBDC). Although the technical characteristics and management may vary from one area to the next, there is a common denominator that describes the utility of these instruments in settlement and establishment of a value store. This area is based on an idea shared by economist James Tobin in 1987. He proposed that a new type of money be issued, which would allow the central bank to regulate the relationships between commercial banks and central banks. It could also give all economic operators the ability to deposit their savings directly at the central bank. This faculty is, along with digitization, the key to innovation. Conventional currencies don’t allow for direct interaction between small savers/investors and central banks.
CBDC vs Cryptocurrencies
There are many forms of digital currency, as mentioned above. These include the Bitcoin, Ethereal, tools, and bitcoin mining which are now readily available to even small savers. These digital currencies are digital representations that represent value and are becoming more accepted as a method of payment. However, they are not subject to central banks or public authorities issuing, guaranteeing or controlling their value. Their value can fluctuate greatly and is determined only by the market demand and supply. CBDCs are, however, issued by a public institution. They are considered “risk-free” because they are part of the central bank’s balance sheet, which includes securities and financing. CBDCs can be considered a currency that is stable and can maintain a high value over time, in comparison to other currencies.
Benefits of CBDCs
The issuance of a CBDC presents many opportunities. A CBDC can have many benefits for countries that are already well-developed.
The introduction of CBDCs offers central banks the opportunity to stop the spread of private digital currencies such as cryptocurrency. They not only expose subscribers to significant exchange rate risks but also weaken institutional arrangements. In the future, their spread could result in the loss of control over money in circulation and the conduct of monetary policies.
The digitization of major currencies could result in a decrease in production and processing costs. This is currently determined by the physical properties of cash. It could also support the competition among operators within the payment system.