CBDCs Are Necessary To Protect Public Money From Private Payments

 

The 6th European Blockchain Convention featured an informative discussion about why Central Bank Digital Currencies (CBDCs) are required to preserve public money. The four-person panel sought to understand why CBDCs are required, the problems they solve, what they mean, how they will function, and what is happening behind the scenes to make them a reality. The consensus was that CBDCs were necessary if public means of payment were protected before private modes overtake them.

“CBDCs are necessary if public means of payment need to be protected before private modes overtake them” – Peter Kerstens, Advisor for Financial Sector Digitalisation & Cybersecurity at the European Comission

Visual of Mr. Andrew Abir, Peter Kerstens, Adam Gagen and Dr. Jörg Kukies at the 6th EBC

Use Of Cash Is Declining

Dr. Jörg Kukies, State Secretary, German Chancellery, asserts that cash usage is going down massively, especially after the onset of the pandemic where people have been discouraged from using paper notes and coins due to hygiene. It’s a point Andrew Abir, the Deputy Governor of Bank of Israel, agrees with even though he admits it feels quite strange for the older generation who are used to cash compared to the young generation who has no problem operating without cash and preferring electronic payments. However, the rise of digital payments doesn’t spell the end for cash since it’s still useful and utilized by a large percentage of the population, according to Abir.

Abir adds that from the consumer’s perspective, CBDCs don’t make much sense since they already have plenty of “central bank money” in terms of cash, cards, and so on. The goal with these new assets isn’t to replace cash that will continue to play a significant role in our economies but to introduce competition to existing payment systems that a few key players dominate, and the entry barriers are quite high. Therefore, CBDCs should reduce entry barriers to allow more players to come in and have a level playing field against the more prominent players; however, central banks have their work cut out as they try to convince the mass population to use these products.

“The goal with these new assets isn’t to replace cash that will continue to play a significant role in our economies but to introduce competition to existing payment systems that a few key players dominate, and the entry barriers are quite high” – Andrew Abir, Deputy Governor at the Bank of Israel.

Several Factors Are Driving The Birth Of CBDCs

Peter Kerstens of the European Commission believes several factors are driving the birth of CBDCs, such as innovation and the fact that central banks are pushing for diversified and competitive payments systems. It’s not like there are problems with existing systems, even though a few can argue they are too expensive or too slow. However, Kerstens adds that people don’t necessarily know what they want until it comes. “No one knew they needed a car, or a GPS or a search engine until they came around and people realized how convenient they were, and they wanted them.” Therefore, while payment systems in most EU countries work well, they can always be improved.

The other driver is the development of the Web3, which is shaping up to be a token-based internet. The assumption is that the Web3 will develop based on private means of money, meaning there won’t be public cash. Since money is a public good and if the blockchain/Web3 economy develops, it will be highly beneficial to have a public means of payment for the Web3 environment. Therefore, the development of CBDCs should also encourage the development of the Web3 economy.

Panel Discussion Visual elaborated by EBC team

Growing Sense Of Urgency To Launch CBDCs

Currently, there is a sense of urgency to launch CBDCs among EU member states. Adam Gagen of American Express, who served as the moderator of the panel, sought to understand why central banks are feeling compelled to launch these projects sooner than later and if it has anything to do with China launching its own central bank digital currency that went from a pilot of a few thousand people using to over 120 million individuals who have used them to transact in two years.

According to Kestens, the actual catalyst was the announcement of Libra, now dubbed Diem, which is a dollar-pegged stablecoin by Meta, formerly Facebook. “Policymakers are worried if big tech companies, with large network effects are to be involved in issuing private means of payment, that could quickly be distributed in the market and overtake the public money. This wouldn’t be ideal” – Dr. Jörg Kukies, State Secretary, German Chancellery. 

“Policymakers are worried if big tech companies, with large network effects are to be involved in issuing private means of payment, that could quickly be distributed in the market and overtake the public money. This wouldn’t be ideal” – Dr. Jörg Kukies, State Secretary, German Chancellery.

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Published February 10,  2022, Barcelona