Written by Angelos Delivorias.
Payment systems are of vital importance for today’s economies and are the core activity of central banks. To adapt to recent trends – including the decline in cash usage, the surge in online commerce and contactless forms of payment, and the creation of cryptocurrencies – central banks have, in recent years, explored the possibility of issuing digital currencies themselves.
Proponents of central bank digital currencies (CBDCs) note that, among other things, they can: alleviate the problem of concentration of the payments infrastructure; facilitate instantaneous and cheaper execution of payments; discourage illicit activity and rein in the shadow economy; spur competition in the payment industry; reduce the problem of banks being ‘too big to fail’; promote financial inclusion; contribute to financial stability; preserve the EU’s sovereignty over transactions; help facilitate monetary policy; and support the international role of the euro.
Critics of CBDCs range from those who question the need for such currencies altogether, to those who point out the risks, including the possibility that CBDCs could: amplify the international spillover effects of shocks; curtail the autonomy of less powerful economies in their monetary policy, and even substitute their domestic currency; facilitate tax avoidance or a loss of domestic oversight capabilities; put at risk the variety of payment instruments available to households; create undesired volatility in exchange rates; and put banks’ deposit bases under threat, with negative implications for credit provision and output.
The European Central Bank (ECB) is involved in the general discussion about the design and launch of CBDCs. In October 2020, it published a report on a digital euro, identifying and discussing features of and options for a euro-area CBDC. In July 2021, the ECB launched an investigation phase, which should last 2 years and aims to address key issues of design and distribution. The European Parliament, as well as other stakeholders, is expected to participate actively in this phase.
Read the complete briefing on ‘Central bank digital currencies: Evolution or revolution?‘ in the Think Tank pages of the European Parliament.
Listen to policy podcast ‘Central bank digital currencies: Evolution or revolution?‘ on YouTube.