There is a growing topic in the fields of economics and finance that deserves attention: CBDC, short for central bank digital currencies. In a world speeding toward full digitization where cash is increasingly replaced by payments with a tap of a phone, a payment method inspired by deregulated cryptocurrencies like bitcoin but governed by monetary authorities is becoming more plausible. The European Central Bank has published several discussions in recent months about the benefits of a digital euro for both citizens and businesses in the euro area. The United States Federal Reserve is exploring a similar path for the dollar. In both cases, no final decision has been announced, and no official launch date has been set.
China has already rolled out the digital yuan, though it still accounts for less than a percent of the total money supply. A recent McKinsey report notes that 87 countries are considering digital currencies, collectively representing more than 90% of world GDP. This shows the scale of interest and the potential impact on global finance.
Central bank money versus private money. Understanding the digital euro requires a clear view of how central bank money and private money differ. Central bank money is issued by the ECB and carries public sector backing. The physical coins and notes in wallets are examples of central bank money. Private banks create money when they issue loans that appear as deposits in accounts. Card payments or mobile transfers reflect private money movements. Withdrawing cash from an ATM converts private money back into central bank money, while depositing funds converts central bank money into private money. This convertibility helps sustain the two forms of money. The ECB explains that the digital euro would combine the legal guarantee of public money with broad, digital payment adoption. It would allow payments via card or phone app with digital euros, while ensuring the currency remains backed by the ECB.
Contrasting cryptocurrencies. The ECB also believes that expanding the digital euro could influence cryptocurrencies such as bitcoin or ethereum, which are not controlled by public institutions and can be highly volatile, potentially threatening financial stability. Alt economists, like Pablo de Andrés from the Autonomous University of Madrid, suggest that central bank digital currencies could reduce cryptocurrency speculation and create a more stable market.
Will cash disappear? The ECB does not expect to end physical cash. It envisions the digital euro as a complement, not a substitute for cash, preserving central bank money as a stabilizing force in payments. Yet it notes that the surge in online transactions during the pandemic is testing the coexistence of digital and cash payments. The Eurosystem will continue to supply cash as long as there is demand, but cash could play a smaller role if digital payments dominate. The ECB also observes that many electronic payment solutions are managed by non-EU companies, which adds another layer of consideration for monetary sovereignty.
Anti-corruption potential. De Andrés argues that CBDCs could help curb corruption by making it easier to track whether public funds reach their intended recipients. ECB President Christine Lagarde has defended the digital euro as a tool to combat terrorism financing and money laundering. A key mechanism for tracking movements is blockchain technology, which records transaction data in a decentralized manner.
Privacy concerns and social control. A frequent concern about CBDCs is the possibility that governments might use the system to restrict privacy or control spending, especially in inflationary periods. De Andrés downplays this risk, pointing to constitutional protections for fundamental rights in democratic societies. Still, Lagarde has noted that complete anonymity similar to cash is not a feasible option in modern digital currencies, a stance that has sparked ongoing public debate.
global landscape
- Global momentum. A McKinsey study shows 87 countries are exploring central-bank-issued digital currencies, collectively representing more than 90% of global wealth. Some nations, including China, already have digital currencies in circulation, though their impact on the money supply remains limited.
- Policy implications. In a talk about the digital euro, Lagarde underscored that unlike cash, digital movements are not wholly anonymous, fueling discussions about privacy and surveillance in digital payments.
- Timeline uncertainty. The current stage of digital euro development leaves a precise launch date unclear. While the ECB continues its investigations, a transition phase may unfold over several years, with ongoing trials and service integration rather than a sudden rollout.