Authored by Mike Shedlock via MishTalk.com,

Central bank digital currencies are on the way. The German Central Bank just embraced a digital euro. Let’s discuss the risks…

Fintech and Global Payments

 Jens Weidmann, president of the Bundesbank, Germany’s central bank gave the opening speech at the digital conference “Fintech and the global payments landscape – exploring new horizons”

Exploring a Digital Euro

The title of Weidmann speech was Exploring a Digital Euro. 

Emphasis mine with my thoughts in braces [ ]

Paper money, for instance, was first introduced in China about a thousand years ago. This innovation eventually transformed the payments system. Today, digitalisation is on the cusp of overhauling payments.

Central banks have to work out how to respond to this challenge. One possibility is the issuing of central bank digital currencies (CBDCs). According to a survey by the Bank for International Settlements (BIS), the share of central banks conducting work on CBDC for general or wholesale use rose to 86% last year. Many of them have made significant progress.

Two months ago, the Eurosystem launched a project to investigate key questions regarding the design of a CBDC for the euro area. The aim of the investigation is to prepare us for the potential launch of a digital euro. Experiments have already shown that, in principle, a digital euro is feasible using existing technologies.

As my ECB colleague Fabio Panetta has stressed, a digital euro would have “no liquidity risk, no credit risk, no market risk,” in this way resembling cash.

[No Risk? Really] 

The protection of privacy would thus be a key priority in terms of maintaining people’s trust. European data protection rules would have to be complied with. Nevertheless, a digital euro would not be as anonymous as cash. In order to prevent illicit activities such as money laundering or terrorist financing, legitimate authorities would have to be able to trace transactions in individual, justified cases.

[Every Case]

But designing CBDC involves curbing its risks. In order to prevent excessive withdrawals of bank deposits, it has been suggested that a cap be placed on the amount of digital euro that each individual can hold. Or that digital euro holdings in excess of a certain limit could be rendered unattractive by applying a penalty interest rate.

[No Risk? I thought you said there was no risk.]

If a digital euro were accessible for non-residents, this could impact on capital flows and euro exchange rates. What this calls for is international and multilateral collaboration.

[Wait a second, is this another risk?]

Self-reinforcing loops and “lock-in” effects may tie users to one platform and exclude competitors. Some observers have been reminded of “Hotel California”, the famous song by the American rock band “The Eagles”: it’s such a lovely place, with plenty of room; but once inside you can never leave.

[Hotel Central Bank: Once inside you can never leave.]

The Eurosystem has no commercial interest in user data or behaviour. A digital euro could therefore help to safeguard what has always been the essence of money: trust.

[Ah yes, trust that interest rates won’t go even more negative, money won’t expire, and withdrawals won’t be capped].

Central banks need to be at the cutting edge of technology. Otherwise, they cannot provide the backbone of payment systems and offer safe and trusted money for the digital age.

This has prompted all major central banks to start exploring issuance of CBDC. However, our success as a money creator will depend not so much on speed, but on the trust of those who are supposed to use the money.

Europe Moving Ahead

It appears Europe is moving ahead faster than the Fed. 

The risks are obvious.

• Expiring Money

• Increasingly Negative Interest Rates

• Withdrawals Capped

• Withdrawals Taxed 

• Gifts Taxed

And once inside you can never leave. 

Livin’ it up at the Hotel Fedifornia has a nice ring to it. ECBifornia isn’t as catchy. 

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