The ECB released another working paper on the digital euro, providing an extensive technical analysis of a potential European CBDC and its position in the existing financial system.
Issued on May 13, the working paper aims to study issues like financial intermediation, payment choices and privacy in the digital economy.
Abstract
Cash preserves anonymity but cannot be used for more efficient online transactions. By contrast, bank deposits can be used online but do not preserve anonymity. Banks use the information contained in deposit flows to extract rents from merchants in need of financing. Payment tokens issued by digital platforms allow merchants to hide from banks but enable platforms to stifle competition.
An independent digital payment instrument (a CBDC) that allows agents to share their payment data with selected parties can overcome all frictions and achieves the efficient allocation.
The potential creation of central bank digital currency
Electronic payments create vast amounts of data, so data privacy is one motivation for such a change (CBDC) to our monetary system. While more data can in principle enable better products and services, economists have become increasingly concerned about the anti‐ competitive effects of large data monopolies in the form of dominant digital platforms. Broadly speaking, digital public money in the form of a CBDC may have a comparative advantage at providing privacy because, unlike private sector alternatives, it is not subject to profit‐maximization incentives.
The authors studied a setting where merchants can distribute their goods online or offline. Online sales are more efficient, but they require electronic payments, whereas inefficient offline sales can be settled in cash. A tension emerges because merchants need financing, and the use of electronic payments (bank deposits) provides detailed information to their financiers (banks), which are thus able to charge higher loan rates to successful businesses. The use of cash guarantees anonymity and forces banks to elicit information through contract terms. This is to merchants’ benefit, who will therefore sometimes decide to distribute their goods offline (which is socially inefficient).
The introduction of a CBDC with anonymity enables merchants to prevent banks from extracting information from payment flows. Instead, the bank must elicit such information through contract terms. As a result, merchants distribute more goods online, which raises social welfare.
The authors then enrich the model to incorporate digital platforms that issue payment tokens and provide loans. „We show that merchants in fact prefer such tokens to CBDC. Intuitively, the information obtained by platforms through their tokens enables them to compete with banks in the lending market, albeit not perfectly. This improves the credit terms for merchants relative to a CBDC with anonymity, and further raises online sales. However, we show that tokens can also help platforms to fend off potential entrants by keeping merchants locked into a “walled garden”. „
Finally, the authors consider a CBDC with data‐sharing features. Since merchants are now able to share information with the platform and the bank, they are able to enforce perfect competition. As a result, merchants completely move to online distribution, which is the socially efficient outcome. Moreover, a CBDC with data‐sharing also prevents anti‐competitive practices by platforms, further raising efficiency. Our results have important policy implications.
In conclusion: „While a CBDC with anonymity is preferrable to traditional electronic payments such as bank deposits, it may become supplanted by payment tokens issued by large technology firms. This risk would be particularly tangible if those platforms compete with banks in the market for financial services. However, an optionality for data‐sharing features may result in a widespread CBDC adoption.”
Europeans reaction on CBDC – the majority are against
While the ECB keeps promoting a potential digital euro with anonymity-enabled features, the Europeans are not quite optimistic about any CBDC, Cointelegraph reports. According to public feedback from another digital euro consultation, the majority of Europeans are against the adoption of a CBDC in the European Union.
Launched on April 5, the consultation has amassed 14,225 feedback entries at the time of writing, with many opposing the very idea of a central bank-controlled digital currency and associated lack of user privacy. Some online commentators even referred to a CBDC as a “slavecoin,” opposing “digital slavery” potentially introduced by such financial instruments.
„Hello, As an EU citizen I am firmly against the introduction of a digital euro because I don’t want to be dependent on the internet when I buy something. I strictly reject the digital euro, because it leads to total control and restricts our fundamental rights and freedoms. Kind regards, James D.”
Anonymous: „I do not agree with the introduction of electronic currency only (EUR). We have worked our Czech crown and we love it too, I do not want your destructive changes that do not benefit anyone. We do not feel comfortable in the European Union.”
JERNEJ Celestina (Slovenia) „I am totally AGAINST it. In case someone wants to pay digitally, he can use a credit card. A big NO to digital EURO!”
Anonymous: „No to digital euro. No to neverending digitalisation. For our freedom and privacy.”
Anonymous: „No to the digital Euro. It is not the solution to our problem, but more a threat to society. Not only it will be one step closer to a transparent citizen and more governmental control over the individual, but also an even more dependancy on technology and big data in daily life in times of blackouts, war and other coming crisis. Money in cash means maximal independancy, freedom, anonymity, flexibility for a healthy economy and has proved itself over centuries. If something needs to be changed in our currency or for the European Central Bank, then it would be to go back to the gold standard, more control and fines for investment management cooperation and bad banks and their criminal deals and dangerous speculations with stock in the financial sector, which leads to speculativ bubbles, than to financial crisis, then to hyper inflation and ends in an economic crisis, dragging everybody in it and leaves nothing but economic depression, instable markets and poverty.„
Anonymous: „I would like the EU to actually ask its citizens if they want a digital currency. Such a currency will be open to abuse from those in power and will inevitably leave us constantly controlled, possibly coerced by a social credit system, and unable to live freely. How will women in an abusive relationship, for example, be able to put aside a little money in order to escape? I suggest you come back to the issue of a digital currency once you have dealt with fiscal paradises and tax avoidance by the obscenely rich, and once you have reduced the extreme inequality we currently have. Tax the rich and give us back our democracy. And then we can talk about digital currencies.”
Anonymous: „I’m absolutely against introducing digital money. It is the road to China type total control system as an opposite of humanity & freedom of choice.”
More details: Working Paper Series – The digital economy, privacy, and CBDC
Banking 4.0 – „how was the experience for you”
„So many people are coming here to Bucharest, people that I see and interact on linkedin and now I get the change to meet them in person. It was like being to the Football World Cup but this was the World Cup on linkedin in payments and open banking.”
Many more interesting quotes in the video below:
