The world is on a collision course with central bank digital currencies (CBDC), with the European Central Bank (ECB) now entering the final investigative stage for the so-called ‘digital euro’ project, per ECB executive Fabio Panetta.

Panetta made the comments on Monday in a speech for the Committee on Economic and Monetary Affairs of the EP, where the ECB published a report on how people could use the euro-CBDC.

CBDC: a solution in search of a problem

The report also looks at the features and services that the digital euro might provide, as well as how it might be disseminated by intermediaries. The ECB has been investigating technical problems with the digital euro in recent months, and it has also held focus groups to hear from potential users about the qualities they believe a digital wallet should have.

“In a modern economy, being able to pay digitally is a basic need for people,” Panetta said. “With cash, central banks already provide a means of payment that is risk-free, widely accessible and easy to use, and that leaves no-one behind. But the rapid digitalisation of our economies requires us to complement cash with its evolution in the digital sphere: a digital euro.”

Panetta went on to say that a digital euro will help the ECB “maintain its role as a monetary anchor in the digital ear, thereby reassuring us that one euro is one euro whatever form it takes and wherever we go.”

While people have no obligation to use the CBDC, “they should always have the option to use it, just like they do with cash today.” Panetta’s words are in contrast to European policy, however. As part of a set of new directives in December 2022, the EU set a limit of €10,000 on cash payments and exerting oversight on crypto transactions of over 1,000.

When words and actions are not aligned, it’s only natural for questions of trust to arise.

Panetta said that “Europeans see the ability to pay anywhere as the most important feature of a potential digital euro,” and added the ECB has been focused on “investigating the technical solutions that would enable people to easily make payments in digital euro, anywhere in the euro area. But if we want the digital euro to replicate these cash-like features, we need a proper regulatory framework,” Panetta noted.

Legislators will give the digital euro legal tender status on the basis that it is considered to be a public good. However, it is not obvious what ‘good’ a Euro-CBDC would provide that instant digital cash apps like Revolut already offer. People in Europe could use it to make payments anywhere in the Euro area, Panetta said, “so, it would be more beneficial and convenient for all users if merchants that accept digital payments were obliged to accept the digital euro as legal tender.”

The public good

For the euro to be widely usable, Panetta said the ECB must focus on providing access. Accomplishing this can only be achieved via regulatory measures, he noted ominously, as was discovered in previous attempts to build a pan-European payment system. Panetta said achieving widespread acceptance and access are “essential to ensure that the digital euro can support financial inclusion and generate opportunities for financial intermediaries.”

A digital euro would offer a new platform for innovation that is truly European. It would allow these intermediaries to build services for their customers that are instantly available across Europe. It could help domestic payment providers and new instant payment solutions to scale up and operate at the European level. And it would reduce dependence on a few dominant providers, increasing competition and resilience.

Panetta went on to say that for the digital euro to achieve the same adoption as physical banknotes, the EU must adapt a common set of standards, known as a “payment scheme”.

The scope of these standards will be limited to what is strictly necessary to establish and offer users a harmonised and convenient payment experience, while enabling and inviting the supervised intermediaries to develop further services and solutions. The Euro system should be able to govern the standards to ensure that using a digital euro in the future is as standardised as using cash today. It would do so by steering consensus among all involved stakeholders – consumers, retailers, banks and non-banks.

To encourage distribution of the CBDC, Panetta said economic incentives should be used, highlighting four core principles for a euro CBCDC compensation model.

The first principle is that, as a public good, the digital euro should serve society. Second, intermediaries should be compensated for the services they provide, just like they are for other digital payments. Third, legislative safeguards should prevent merchants from being overcharged by intermediaries if they are obliged to accept digital euro as legal tender. And fourth, the Euro system would bear its own costs. This would reflect the public good nature of the digital euro and follow the same logic that currently applies to cash.

Panetta concluded his speech by stressing that the design and regulatory framework for a digital euro are vital “to ensuring that it retains its key characteristics as a public good.”

Capital controls

Notably, the speech was more about the mechanism of reaching ‘buy-in’ rather than the core merits of a Euro-CBDC, potentially because there are none. Indeed, at a glance, none of the ECB’s propositions come even remotely close to being a ‘public good’ as decentralised assets with native privacy, fungibility, scarcity and infinite divisibility such as Bitcoin and Litecoin. On top of that, the use-case is not necessary as the Euro currency is already digital for all intents and purposes. With a Euro CBDC, however, capital control enforcement and direct coercive influence over users is built in.

Last week, traditional French banking conglomerate Societe Generale, a legacy bank that’s deeply tied to the European central banking ecosystem, revealed a coding function in its stablecoin that allows the bank to take all your money or even burn money. Is this what Mr. Panetta had in mind when discuss the Euro CBDC as a public good?

The final stage of the investigation phase is expected to be launched later in 2023 and will focus on developing and testing the possible technical solutions and business arrangements necessary to provide a digital euro, Panetta said.

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