Digital Central Bank Money - Useful Supplement to Cash or Abolition by the Back Door?

Is digital cash replacing tangible cash? / Image credit: Created with Midjourney

Once again, the topic of digital central bank money is haunting the media, as the EU Commission presented a legislative proposal to regulate a digital currency at the end of June and the ECB wants to decide on the introduction of the digital euro as a means of payment in October 2023.

What would the introduction of the digital euro mean? Would it mean the abolition of cash as we know it?

What is Digital Central Bank Money?

Central Bank Digital Currency, or CBDC for short, describes a monetary system in which money is issued directly by the central bank.

Like cash, digital central bank money thus describes a liability of the central bank, and thus differs from giro money (the "book money" in the bank account). In the current system, more than 80 percent of the money is giro money, created "out of nothing" by the private commercial banks.

This works because the sum of loans granted by banks is significantly higher than the deposits of savers at the banks. Each loan thus creates "new" money.

Why do central banks want to introduce digital cash?

More control over money creation

In a system of unsecured money, any bank can create new money. Every time a commercial bank grants a loan, new money is created (secondary money creation), and the money supply grows. With digital central bank money, however, this money creation would be under the full control of the ECB, just as it is with cash. This would give the central bank significantly more control over the money supply.

Digital vs. "cashless" payment

Image credit: Jonas Leupe / Unsplash

The payment process with digital cash at the checkout would not differ greatly from contactless payment by card or mobile payment. You hold a card, smartphone or smartwatch up to the terminal and the amount is paid.

However, the mode of operation behind it would probably be significantly different. Instead of ensuring bookings on the bank accounts of the buyer and seller, payment would be much more direct.

The digital cash would be stored as a "token" in a virtual wallet, e.g., on the smartphone / card, similar to cryptocurrencies. When paying, this token would then be transferred directly from device to device (peer-to-peer). This would eliminate the "detour" via the bank, credit card provider or payment service provider.

However, this information that a virtual euro has changed hands has to be stored somewhere. Unlike Bitcoin and other cryptocurrencies, however, this database would probably not be distributed in a decentralized blockchain on countless computers, but under the control of the central bank. And this is where the criticism must start.

Digital cash including surveillance?

While "real cash" can change hands without leaving any traces, the anonymity of "cash payments" with digital money with a blockchain database under the control of the central bank would probably be more than questionable! Rather, the scenario of the "transparent citizen" threatens to become true.

While Bitcoin and many other cryptocurrencies function as decentralized open-source concepts, here a powerful actor, the central bank, would have complete control over the money. And with this influence, the "guardians of the currency" would probably also have completely new monetary policy instruments at their disposal: Control of the money supply in circulation and interest rate control would be much more direct.

Critics note that this control could go as far as introducing an "expiration date" for held digital cash (as in the free money, or better "shrinkage money" approach).
However, caps on the digital euro are being discussed quite openly: officially, in order to prevent bank runs from occurring and bank customers shifting their entire giro money into the digital euro.

Digital central bank money must not replace real cash

Digital cash can be useful in everyday life as an additional supplement. However, it must not become a substitute for real, physical cash.
After all, cash stands for freedom, independence, and anonymity. It works for everyone - without electricity, without a terminal, without technical knowledge.

Digital central bank money - just like cash in general - is not suitable as a store of value. If you want to preserve your assets in the long term and protect them from a loss of purchasing power, you should invest a good part of your savings in gold, silver, platinum. Because only these have retained their value for thousands of years and are accepted everywhere and at all times.

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