Insight
Why would anyone use a central bank digital currency? by Zach Meyers, 7 June 2022 Central banks are rushing to pilot their own digital currencies. These may sound exciting. But they may offer users few compelling benefits they do not already enjoy. Consumers are abandoning cash in favour of digital payments – a long-term trend that rapidly accelerated during the pandemic. Central banks are fretting about the consequences. Are consumers too reliant on US card networks, which recently withdrew their services from Russia, demonstrating that even private payment systems can become drawn into international conflicts? Are alternative systems needed to improve the economy’s resilience to system outages, natural disasters or cyberattacks? Does it matter if there is no longer a public alternative to private payment services like card payments? And will consumers who value the privacy of cash adopt riskier alternatives like Bitcoin or stablecoins, some of which have been recently proven to be unsafe stores of value? Nearly all central banks globally – including those in the EU, UK and US – are examining retail central bank digital currencies (CBDCs) such as the ‘digital euro’ as a potential answer to these concerns. Many are ploughing ahead with pilots already. A retail CBDC would allow consumers access to electronic money backed by the central bank. Today, only commercial banks generally have this privilege, in the form of central bank reserves. Individuals can hold central bank money, but only in physical form – as banknotes and coins. When individuals hold funds electronically, those funds only represent a claim on the private bank that manages the account, not the central bank. However, everyday consumers in Europe may find this revolution to be an academic one. Europe’s banking sector is robust and deposits are guaranteed up to a generous limit. Consumers, quite reasonably, consider bank savings to be about as safe as cash. And CBDCs would probably be provided via commercial banks, and could allow payments through a mobile app, a card, or a similar device. So a CBDC could look similar to any bank account today. State-backed savings options are already available for those who want them. Whether consumers and retailers would actually prefer to use a CBDC for payments – rather than private payment services like today’s cards – is therefore not obvious. Some central bankers imply usage is CER INSIGHT: WHY WOULD ANYONE USE A CENTRAL BANK DIGITAL CURRENCY? 7 June 2022
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