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There is much discussion today about a possible digital euro (PDE). Is this attention exaggerated? Are “central bank digital currencies” (CBDCs) “a solution in search of a problem”, as some have argued? This article summarizes the main facts about the PDE and concludes that, if the decision on adoption had to be taken today, the arguments against would outweigh those in favor. However, there may be future circumstances in which having a CBDC ready for use can indeed be useful. Therefore, preparing is a good thing, even if the odds of its usefulness in normal conditions are slim.
There is much talk today about a possible digital euro (PDE), while Europe – indeed, the whole world – is ridden by apparently more serious problems: inflation, war, climate change, health risks, and more. Is that attention exaggerated? Are “central bank digital currencies” (CBDCs) “a solution in search of a problem”, as some have argued?1 Perhaps we should see this from a different angle. CBDCs can be useful, indeed crucially important, not in spite of but precisely because there are those risks. The digital euro is not, as some contend, a sort of deus-ex-machina2 that will solve flaws of today’s payment system and shape its future, but a precautionary device for adverse circumstances. Our current market-based payment system does not need salvaging or reshaping because it fundamentally works, although, like everything else, could be improved. But it is fragile: the more so because it is becoming increasingly complex, digital, and online. Complexity enhances risk. Guarding against such risk is an area where CBDCs can really help.
In this article,3 I summarize the main facts about the PDE and argue that, if the decision on adoption had to be taken today, the arguments against would outweigh those in favor. Next to that, I note that there may be circumstances – admittedly unlikely and adverse ones, but not impossible – in which having a CBDC ready for use can indeed be useful. Therefore, preparing is a good thing, even if the odds of its usefulness in normal conditions are slim.
One way to start is to observe that, in spite of its purported kinship with banknotes and coins, the introduction of a digital euro is actually likely to result mainly in a substitution away from traditional bank deposits, leaving the demand for cash essentially unchanged.
Multiple reasons lead to this conclusion.
Banknotes have unique characteristics – simplicity, absolute privacy, and – I dare say – tangibility as well – that are highly valued and that the digital euro will never have. Multiple survey analyses demonstrate that people value those characteristics highly. This is likely to be a key reason why cash, far from disappearing everywhere as some argue, is very popular everywhere in the world – with minor exceptions.4 A few data illustrate this. In the 21 years of their existence, euro banknotes have increased sevenfold in value, up to 1.6 tn. euros; this amounts to a compounded increase of about 10% per annum. The equivalent figure for the US dollar is 6.5%, for the British pound 5.2%, for the Swiss franc, 4.4%. Were we to judge by this metric alone, we would conclude not only that cash reigns everywhere, but also that the euro is the world’s most popular currency.
Some argue that the popularity of cash reflects growing illegal activities, but this is unlikely to explain most of the phenomenon. The increase of the euros in circulation during that period was very steady year by year; indicators of criminal activity do not have such a smooth profile. And the increase in euro coins shows more or less the same pattern. It is unlikely that criminals and tax evaders make extensive use of coins. A more relevant explanation is that people actually like to hold euro banknotes, in spite of the fact that for many retail purposes, cash is replaced by more convenient digital means – online platforms, payment cards, smartphone applications, and the like...
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