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We can say that the central banks (among them the European Central Bank) raised their pillars. The central bank digital currency is now a concrete working hypothesis and the question is no longer whether it will be done but how and when it will be in our virtual pockets.
As for the digital euro we’re talking about five years. Huge sum if you think that China wants to launch a pilot project already starting from the Beijing Winter Olympics and that the challenge that big tech faces with its virtual currencies is closer and closer. The risk of arriving late is present but the need for such a long load is explained by many aspects that are yet to be developed. These are the relevant aspects that need to be handled carefully and that can greatly affect the success of the project. In short, haste can be the enemy of good.
Let’s see the main node to solve.
Let’s start with some fixed points. It is central bank money like banknotes. This means that we will not be exposed to any risk other than the loss of purchasing power due to inflation. Unlike our money deposited in a bank, which we may not review if it fails (deposits are not guaranteed over €100,000), there is no risk of losing our money because the central bank cannot fail. The second consistent point is that the currency will be legal tender, and can/should be used by all economic operators to carry out transactions, an aspect that is more than a regulatory and interoperability issue with the existing payment system. The theme is to ensure universal access to the new currency, but it is currently expected to coexist with classic banknotes.
Without compromising these aspects, the design of central bank digital money needs to address some points.
Secrecy. First, the choice must be made on a topic trade off Confidentiality and traceability of the tool. Until now, banknotes and money deposited in the checking account are placed in two opposites: banknote transactions are confidential/anonymous and difficult to trace, and payments made by credit card or bank transfer are fully traceable. The issue is delicate, if the use of cash to conduct transactions with funds of questionable origin is severely limited by the physicality of the instrument, things could change dramatically in the case of digital money. Use of bitcoins For illegal operations attest to this. The choice is related to the alternative based on the symbol (You can spend the digital currency if you know the encryption key) or on account basis (You can spend the digital currency if you prove your identity). This point can be resolved thanks to new technologies that ensure the anonymity of transactions with the possibility of verification by the authorities under certain conditions.
digital currency cost. Banknotes are a very inexpensive payment tool but cannot be used for digital payments, while online payments made via credit cards / bank transfers are very expensive (in some countries up to 1% of GDP). It is not yet decided who will bear the cost of the infrastructure that will make the digital currency work. It is not inconceivable that we will move towards some form of support from other forms of intermediation/service provision or from the central bank itself. The topic is relevant because the digital user usually does not want to pay any fees.
The role of financial intermediaries. Although the digital currency will be issued by the central bank, the important point is to understand whether the citizens will have a current account with it or it will be brokered by the banks. On the one hand, the central bank is not equipped to manage the current accounts of three hundred million people, and on the other hand digital money cannot be entered into the balance sheet of banks (such as deposits) as in this case it will be entirely the equivalent of current deposits. A hybrid form of brokerage should be developed with digital money managed by brokers without being included in their balance sheet. The point of interest is that in any case there will be mediation with negative repercussions on the availability of credit for the economy.
Compensation. Banknotes are not compensated, deposits are usually paid. What will happen to central bank digital money? The question is open and questions its very nature, if it should be merely a means of payment, then no reward is needed, if instead it should have the properties of a store of redeemable value. The point is very sensitive because any remuneration would make the digital currency a very attractive alternative to deposits, exacerbating the risks of non-intermediary.
technical problems. The problems are many, three above all. If I want to use my digital currency to buy bread in the event of a power outage, what should I do? A similar argument concerns the use of digital currency in so-called offline payments, which are payments that I would like to make, for example, in an area where there is no internet connection. The second issue concerns the use of information contained in cryptocurrency transactions for commercial purposes that require well-defined governance and protections. Finally, there is the issue of security: a centralized system (headed by a central bank) for managing digital money will be a very attractive target for hackers.
We need to move quickly but these issues must be addressed and the ideas are not clear. Given our homeland, the real question to ask is whether Europe has the flexibility to promote such an ambitious project in an efficient and timely manner. Convincing different countries (citizens and financial operators) to agree on the characteristics of the digital euro will not be easy.
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