Does this revolution in payment methods mean we are heading toward a society without coins or bills? Even though cash likely still has many good years ahead of it—as acknowledged by the Bank of Sweden’s call to improve access to cash—central banks have taken stock of these rapid changes in consumer behavior.
About a hundred of them are currently working on a central bank digital currency (CBDC) project, a monetary instrument that complements cash. This monetary innovation is driven by the desire to facilitate payments, increase financial inclusion, and improve the transmission of monetary policy—but also, and above all, to preserve states’ sovereignty over currency. Indeed, the rise of private monetary innovations—such as Bitcoin-style cryptoassets or the GAFAM companies’ stablecoins—has raised concerns about the loss of control over currency, which is a public good.
However, the digital form that central bank money might take does not call into question the pillar of trust upon which the circulation of all currency rests. A currency has no real value unless citizens embrace it and place their trust in it. If everyone were to start believing that euro bills are worthless, they would indeed be worthless.
The gradual disappearance of cash is leading to the exclusion of the most vulnerable from socioeconomic activity and to a privatization that erodes the symbolic dimensions of money. https://t.co/PmGRE9uN3K
— The Conversation France (@FR_Conversation) January 3, 2023
What would happen if currency became entirely digital? In the eurozone, exploratory work on the development of a digital euro was launched in July 2021. Three years later, where do things stand?
On June 24, the ECB published its first report on the preparatory work. The report provides extensive details on the technical design of an “offline” payment solution aimed at addressing the primary concern of lawmakers and central bankers: the protection of personal data. Unlike cash, which changes hands, a digital currency relies on an infrastructure where every transaction leaves a trail: location, date, time, amount, recipient…
"Digital currency data, " which until now has been accessible only to banks and traditional card payment providers, could become available to the ECB, the issuer of a digital euro and developer of a payment app. ECB President Christine Lagarde has her own take on the matter: “It is certainly preferable to entrust this task to a digital euro under the control of the ECB, which has no interest in exploiting the data, rather than to a private operator that would certainly have a direct interest in exploiting the data as well.”
Some, however, may fear that their data will fall into the hands of a public institution. For many, the fear of being “tracked” still justifies using cash rather than a bank card or a payment app. The ECB will need to reassure all those who see it as a new “Big Brother” by demonstrating its ability to guarantee data privacy. In some countries, such as China, users prefer to use private payment methods like Alipay, WeChat Wallet, or QQ Wallet rather than the People’s Bank of China’s e-yuan, out of fear that this digital currency could be used for societal control.
Confidence in a currency depends above all on its acceptability in trade; it is often the result of a bandwagon effect: “Because others use the euro, I use it too.” This is what institutionalist economic theory refers to as “methodical trust.”
To be accepted, a currency must be secure and tamper-proof in order to guarantee the stability of its value. A prerequisite for the success of a digital euro is the effective management of all cyber risks. Any successful attack could undermine the central bank’s credibility in its ability to defend its currency. How would you react if your bank account could be easily hacked? You would undoubtedly switch banks. But if it is the ECB—the bank of banks—that is attacked, there is no option to switch! The resulting loss of confidence could spread throughout the banking system, triggering panic and severely destabilizing the currency’s value. Exposing oneself to cyber risks is therefore a risky gamble that requires central banks to carefully weigh the pros and cons; this explains the reluctance of the Federal Reserve (Fed), the U.S. central bank, to roll out a digital dollar.
Now, let’s imagine that the risks are under control: the rollout of a “digital euro” payment method in the form of an app would take place within an already broad and competitive “payment ecosystem” filled with fintech players. This would be an unprecedented situation (since there is no equivalent to the physical euro), and the freedom of choice afforded to European citizens would thus serve as a formidable test of the trust placed in the euro.
Why do people still pay with cash? Insights from Yulia Titova (#IESEG), Delia Cornea, and Sébastien Lemeunier (@ebs_Paris) https://t.co/Bmw9GDrQhe via @FR_Conversation #IESEGResearch #inequality #payment #currency #cryptocurrency pic.twitter.com/bhudOjwnQT
— IÉSEG (@IESEG) May 11, 2023
Why would anyone pay with the ECB’s app rather than another one? Undeniably, because of its ease of use and the size of its user network. This ties back to systematic trust—that is, the extent of the currency’s acceptance network. But if the app has no other competitive advantages, what are the reasons for adopting it? The failure of “dinero electrónico” in Ecuador—the first central bank digital currency—in 2014 can be explained by Ecuadorians’ reluctance—whether justified or not—toward a currency “manipulated” by the government to serve political interests.
In a competitive monetary environment, it is necessary to provide assurances and offer reasons to adopt a currency. Advocates of local and complementary currencies do so by putting forward a political and activist case for the relocalization of trade and ethical finance. Will European institutions be able to convince citizens to adopt the digital euro?
Anicet Caron, a master's student at Sciences Po Lille, also contributed to this article.
