Europe moves forward with CBDC
The European Central Bank (ECB) Governing Council last week announced it has completed two years of research into a central bank digital currency (CBDC) and is now moving to the “preparation phase.”
A CBDC is a digital currency issued and governed by a central bank. A digital euro, for example, would be issued by the ECB — though critics point out that unlike cash, it could also be withdrawn by the ECB. A digital euro could be used at any point of sale and in any transaction, which would be settled instantly.
On November 1st the ECB will “start laying the foundation for a possible issuance of a digital euro,” though the decision whether to actually issue one will come after the European Union completes its legislative process on CBDC.
This “preparation phase” is expected to last another two years and will involve finalizing a “rulebook” for the CBDC, choosing providers to develop it, and testing.
Critics of CBDC have expressed concern that such currency at the very least would lack the anonymity of cash, as confirmed by Federal Reserve Chairman Jerome Powell. But it could also open the door for authorities to control the funds of private citizens, a possibility already put forth by International Monetary Fund (IMF) Deputy Managing Director Bo Li in April.
Notably, Brazil’s Banco de Brasil, which has already begun testing its digital currency Drex, has included a hidden feature in the currency that allows the central bank to freeze taxpayers’ funds and adjust balances.
ECB President Christine Lagarde said a digital euro “would coexist alongside physical cash, which will always be available.” But this does nothing to assuage the fears of some analysts who say the government could still control the CBDC it issues, whether through social programs or tax refunds.
At the World Economic Forum (WEF) Summer Davos conference in May, Cornell Professor Eswar Prasad advocated for governments using central bank digital currencies to control citizens’ purchases.
“If you think about the benefits of digital money, there are huge potential gains. It’s not just about digital forms of physical currency. You can have programmability [like] units of central bank currency with expiry dates,” he said.
“You could have . . . a potentially better — or some people might see it, a darker — world, where the government decides that units of central bank money can be used to purchase some things but not other things that it deems less desirable, like say, ammunition or drugs or pornography or something of the sort. And that is very powerful in terms of the use of a CBDC.”
Earlier this year the Bank of Israel, the Central Bank of Norway and Sweden’s central bank Sveriges Riksbank, announced the completion of Project Icebreaker, an initiative they began last year to create and test how CBDCs can be used for cross-border and cross-currency payments. The central banks were assisted by Swiss tech firm BIS Innovation Hub Nordic Centre.
“Project Icebreaker is unique in its proposition. It first allows central banks to have almost full autonomy in designing a domestic retail CBDC. Then it provides a model for that same CBDC to be used for international payments,” explained BIS Innovation Hub Innovation Head Cecilia Skingsley.
In February, the Reserve Bank of Australia announced its selection of 14 use cases for CBDC testing. The central bank will explore how a CBDC can be used for offline payments, nature-based asset trading, corporate bond and tokenized foreign exchange settlement, CBDC custodial models and high-quality liquid assets securities trading, as well as other use cases.
The Bank of Japan began testing its own CBDC in April after completing its proof-of-concept. Since October the Japanese Credit Bureau (JCB) has been building its own digital currency to simulate how people would be able to pay at restaurants with CBDC using credit cards. The company said that while it is currently using touch payments, JCB is working on providing mobile solutions for CBDC where users can pay via mobile app and even QR codes.
One country, however, is experiencing unexpected difficulty in rolling out a CBDC.
Nigerians have taken to the streets in protest to demand a return to cash after the government began forcing its CBDC on citizens.
The country’s central bank debuted Africa’s first CBDC in late 2021 but the digital currency was given a cold reception as less than 0.5% of Nigerians used it. To try coaxing citizens into adopting CBDC the Nigerian government removed restrictions that required bank accounts to use CBDC. When that failed, the government offered discounts on cab fares if riders used CBDC to pay.
When neither of those worked the Nigerian government launched a war on cash and restricted cash withdrawals to 100,000 naira ($225) per week for individuals and 500,000 naira ($1,123) for businesses. At the same time, the government also decided to redesign the currency, which limited banks’ cash reserves while they waited for the newly designed currency.
Nigerians have reportedly erupted in protest over the cash restrictions, but the government is doubling down. Central Bank of Nigeria Governor Godwin Emefiele said, “The destination, as far as I am concerned, is to achieve a 100% cashless economy in Nigeria.”
