CBDCs may be all the rage among central bankers, but as long as they offer little in the way of public benefit while posing huge risks to privacy, anonymity and other basic freedoms, they will struggle to gain traction.
A few months ago, European Central Bank (ECB) President Christine Lagarde had a rather surreal phone conversation. Under the mistaken impression she was speaking with Ukraine’s strongman President Volodymyr Zelensky when in actual fact she was talking to a notorious group of Russian pranksters, she opened up about the ECB’s plans for the digital euro, freely admitting that one of its main objectives is control and surveillance of people’s spending habits (something we have been warning about for the past year and a half). Her exact words:
“There will be control. You’re right. You’re completely right. We are considering whether for very small amounts, you know, anything that is around 300, 400 €, we could have a mechanism where there is zero control. But that could be dangerous…”
Lagarde also cited the war in Ukraine and Europe’s increasingly hostile relations with Russia as justification for a CBDC, saying: “I don’t want Europe to be dependent on an unfriendly country’s currency,” such as China’s or Russia’s. She also said the fate of a digital euro would be decided in October.
Here’s the recording in full:
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ECB Leading the Way on CBDCs in the West
October is now just three months and one day away. As Reuters reported this week, the European Commission has already published draft legislation that will give legal underpinnings for a digital euro, assuming “the ECB decides to issue one in the coming years.” That seems to be a fairly sound assumption. The German financial journalist Norbert Häring has analysed the proposed legislation in depth and concludes that the only identifiable function of the digital euro is to “help displace cash and bring Europe closer to total digital surveillance”.
Of all Western central banks, the ECB is furthest ahead in the race to launch a CBDC, though it is still far behind China and India, both of which are already at the pilot stage of their respective CBDCs. In a talk last week with executives of European commercial banks, the Governor of the Banque de France, François Villeroy de Galhau, described the creation of a digital euro as a “duty” for Europe’s central bankers (a word Christine Lagarde has also used in the past).
“It’s very probably our duty to issue a CBDC, but it is our will to issue it with you, commercial banks, and not against you,” he said, adding that central banks are “complementary and not competitors on money and payments.” But Villeroy de Galhau also made it crystal clear that the ECB is determined to digitise so-called “public money” in the Euro Area: “As everything becomes digital, why should central bank money be the only thing to remain on paper?”
Some commercial lenders are concerned that central bank digital currencies (CBDCs) will lead to the disintermediation of the private banking system by offering users a safer place to store their money: i.e., a central bank. But Villeroy de Galhau attempted to allay such fears, insisting that the digital euro would not replace other forms of money. In fact, money, he said, “is and will remain a public-private partnership.”
A Serious Marketing Problem
One thing that is becoming increasingly clear is that the ECB’s digital euro, like all prospective central bank digital currencies, has a serious marketing problem — not just among commercial banks worried about the threat it could pose to their business model. As the FT reported last month, there are “mounting questions among consumers, financiers and politicians over exactly what the project actually aims to achieve and whether the potential risks outweigh the benefits”:
These questions have only grown as the immediate threat from cryptocurrencies has faded along with the decline in the value of bitcoin and other rival forms of money…
Some European policymakers fear that a failure to make a clear case for the digital euro will undermine the project before it is even born — that it will come to be seen as a solution that does not quite know what problem it is solving.
“What is the compelling reason for making this reform?” This is the big unanswered question,” says Ignacio Angeloni, a former ECB official who is now a part-time professor at the European University Institute in Florence. “I don’t see any big failures in the market that require the public sector to step in and provide a digital euro.”
Getting the Narrative Right
As we recently saw in Nigeria, CBDCs may be all the rage among central bankers, but as long as they offer little in the way of public benefit while posing huge risks to privacy, anonymity and other basic freedoms, they will struggle to gain traction. Under the stewardship of Godwin Emefiele, its former governor, the Central Bank of Nigeria tried just about every ruse under the sun to expand public adoption and use of the eNaira, including removing half of all cash in circulation. But to no avail. Cash is still King in Nigeria and Emefiele is behind bars.
In Europe, central bankers are equally confident that the digital euro is just what the Euro Area’s floundering economy needs. But some politicians — who still have to care about annoying little things like public opinion, at least come election time — have serious reservations. When EU finance ministers met on June 15 to discuss the digital euro, “it was hard to muster enthusiasm for the putative CBDC,” notes a report by Coindesk. Eurogroup President Paschal Donohoe put it as delicately as he could:
“The discussion today was taking place in the context of the Commission finalising their work to bring forward a legislative proposal with regard to this project. To be clear: what that work will do is not create a digital euro itself, but create the legal framework for the possible issuance of a digital euro at a future point in time.
Issues that ministers discussed here today were the importance of developing a compelling and clear narrative regarding what would be the added value of this development and the difference that it would make to the lives of the citizens of Europe and to the commercial activity of businesses within the European Union. We acknowledge that while there is broad support regarding the project that is underway, within our institutions ministers want to support this work but also look at how we can further develop that narrative.”
Meanwhile, in Slovakia…
The national government recently passed a constitutional amendment to codify the right of its citizens to pay for goods and services with cash, becoming the first country in the world to do so. The ruling is intended to protect physical cash payments from a future in which the digital euro becomes mandatory.
“[The digital euro] may be initially sold as an alternative, but gradually it will become apparent that it can only be exclusive,” said liberal MP Marián Viskupič of the digital euro plans. He warned that it would bring about “monitoring of a person’s entire life” by the ECB and called it “a social engineer’s dream”.
Slovakia’s National Council has also relaxed the country’s cash payment limit, from €7,000 to €15,000, becoming the second country to do so this year, after Italy’s Georgia Meloni government.
The ruling on cash payments will come into effect tomorrow (July 1). But as Hakon von Holst reports in an article cross-posted on the German financial reporter Norbert Häring’s largely German-language blog, Geld und mehr (Money and More), it is full of loopholes (machine translated):
Shopkeepers will have the right to refuse acceptance for “reasonable or generally valid reasons”. There are numerous posible exceptions to this wording, which it is up to ordinary law to decide.
It remains unclear whether the right to cash payment has actually been strengthened, but the symbolic effect cannot be overlooked. Some media also reported abroad. Slovakia is the first country in the world to include cash payments in the constitution.
The concerns of Slovakian MPs appear to be well justified. As Häring himself reported yesterday, the Europe Commission is also preparing draft legislation on the status of cash as legal tender. That legislation, if approved, would make it easier for retailers in the Euro Area’s 20 member countries to reject cash payments while giving the digital euro privileged status as legal tender, says Häring:
Cash users would have much less entitlement to their preferred means of payment than users of digital euro central bank money. It is obvious that the EU Commission (together with the ECB) does not want to supplement cash with the digital euro, but rather to replace it altogether.
What Will a Digital Euro Consist Of?
The main innovation offered by retail CBDCs is that they will provide all citizens and businesses with direct access to central bank money that can be used in digital payment transactions. This, it is argued, will help to preserve the role of public money as more and more citizens abandon cash in favour of digital payment methods. It will also radically simplify digital payment processes by cutting out most of the financial intermediaries that facilitate digital payments today (payment processors, banks, financial clearinghouses, and, if your money is crossing borders, international communication and exchange systems), as well as the juicy fees many of them extract.
But this would only be the case if central banks offered the retail CBDC directly to individuals and businesses, which would mean allowing everyone to hold the equivalent of a current account at the central bank (as long as they have a smart phone and don’t engage in the wrong sorts of behaviour). That is not what is on offer here.
Instead, citizens would hold a special account at a commercial bank that would give them access to central bank digital money. Unlike normal bank accounts, the balance would not be a loan to the bank but rather something more akin to a trust or securities account. The account holder would own the digital euros in the account while the commercial bank would merely manage it as a service provider. The central bank and bank supervision would guarantee that a digital central bank euro and a euro bank deposit retain the same value and can be used in the same way in payment transactions.
In order to protect financial privacy, the ECB’s plans for the euro area envisage offering the possibility of loading the digital euro onto electronic wallets, which can then be used to make direct payments, with the service providers (the banks) constrained to knowing how much money is to be withdrawn.
The proposed features of the digital euro bears a lot of similarities with the digital pound being developed by the Bank of England and the UK Treasury. As with the digital euro, the public interface of the digital pound will be the private commercial banks.* The BoE is considering imposing a limit on the holdings of the new digital pound of £10,000 to £20,000; the ECB is thinking of setting a limit of around €3,000. Neither CBDC will bear interest, though who’s to say whether the central banks might one day apply negative interest rates (one of the oft-cited advantages of CBDCs for central bank policy makers).
No Public Debate
But where is the public debate in all of this?
There is none, or should I say whatever public debate that does occur is despite the almost complete silence on the issue in the mainstream media. Even at election time in most ostensibly democratic nations, CBDCs are not up for public discussion.
It is not hard to see why. On the exceptionally rare occasions that members of the public are actually consulted on the matter, the majority opinion (at least among those with a view on the matter) is overwhelmingly negative. Such was the case in a recent survey conducted in the US by YouGuv and Cato Institute, which found that more than twice as many US citizens are against (34%) a digital dollar than in favour (16%). Most of the people consulted (49%), however, have yet to form an opinion, probably due to their general lack of knowledge of CBDCs.
This is a feature, not a bug, of the rollout of CBDCs in the West (and the rest of the world). As I noted in my March 25, 2022 piece, Unbeknown to Most, A Financial Revolution Is Coming That Threatens to Change Everything (And Not for the Better), “CBDCs are among the most important questions today’s societies could possibly grapple with — not only from a financial or business perspective but also from an ethical and legal standpoint. They should be under discussion in every parliament of every land, and every dinner table in every country in the world.”
That is not happening. Instead, they are being rushed through as quickly as possibly with virtually no public debate whatsoever. As the YouGuv / Cato survey suggests, most people do not know (and in some cases, perhaps do not even care) what CBDCs are, or how their implementation could impact their lives. And that suits the central banks just fine.
Yet despite the almost total absence of public debate around the adoption of CBDCs, a push back of sorts has already begun in some countries. In Switzerland, where cash remains the point-of-sale payment method, the Swiss Freedom Movement (FBS), a pressure group with libertarian leanings, announced in February that it had collected enough signatures (111,000) to trigger a national vote on preserving cash for posterity. Across the border in Austria, whose citizens are equally fond of cash, 530,000 citizens signed a referendum last year calling for “unrestricted cash payments.”
* The last thing the world’s central banks want to do is wipe out large private banks, whose interests they tend to serve above all else. In fact, central banks are working hand-in-glove with many TBTF lenders (JP Morgan Chase, Goldman Sachs, HSBC, BNP Paribas, BBVA…) to set up and road test the CBDC infrastructure. What the BoE and many other central banks are talking about doing is creating an extra layer of operations within the financial system.
If any financial institutions are going to be “disintermediated”, it will probably be small, local banks and credit unions, which will not be able to cope with the added layers of regulatory costs, burdens and complexities. In the US, the National Association of Federally-Insured Credit Unions (NAFCU) emphatically warned last year that the issuance of a digital dollar could erode financial stability, arguing that the costs and risks associated with introducing a CBDC are likely to outweigh the touted benefits.