In a context where the use of cash is in decline and digital payments and cryptocurrencies are the order of the day, more than 130 countries are considering the introduction of central bank-issued digital currencies (CBDCs). What are the pros and cons of these new digital currencies?

The digitisation of the economy has brought the convenience of being able to make digital payments and has spurred the popularity of cryptocurrencies. This revolution in the financial system has led many central banks, initially reluctant to introduce them, to consider issuing their own digital currencies (CBDCs).

In this context, Europe does not want to be left behind and will create its own digital currency, as countries such as China, Sweden, and Uruguay have already done. Known as the digital euro, it is an electronic currency that will be managed and supervised by the European Central Bank (ECB), which can be used by both citizens and companies and which will not replace cash, but will complement it.

As for the Spanish state, the Banco de España (BdE) has positioned itself in favour of the introduction of the digital euro, issuing a statement highlighting what it considers to be the advantages of this CBDC and giving its support to the ECB. Juan Ayuso, Director General of Operations, Markets, and Payment Systems at the Banco de España, stated that the digital euro retains the advantages of the physical currency and pointed out that the physical cash format ‘does not allow all the advantages offered by the growing digitalisation of the economy and society to be exploited’.

A complementary payment method

Financial inclusion. A centralised digital currency can contribute to financial inclusion, especially in areas where access to traditional banking services is limited. It would also be an alternative to cash in extreme situations, such as disasters, where cash cannot be used and where traditional means of payment, such as POS, do not work.

Security and financial resilience. One of the main promises of CBDCs is to improve the security and resilience of the financial system. Unlike decentralised cryptocurrencies, CBDCs are backed by central banks, which guarantees their value and makes them less susceptible to fluctuations in cryptocurrency markets. Therefore, the digital euro would just be another way of paying in euro, convertible at parity with physical money.

Reduced transaction costs. CBDCs eliminate the need for intermediaries such as payment processing institutions. Moreover, their digital implementation simplifies the transfer of cash, which benefits both individual users and businesses, especially in international transactions, where traditional costs are high. As for the digital euro, it is designed to be costless for individuals using it to make ordinary payments and can be used anywhere in the euro area.

Traceability and transparency. CBDCs allow detailed tracking of financial transactions, which can help governments combat money laundering, terrorist financing and tax evasion. However, the European banking regulator says that the digital euro would allow payments to be made without sharing data with third parties unless this is necessary to prevent illicit activities.

What are the potential risks?

Privacy and government control. One of the most important concerns about CBDCs is the potential loss of privacy for users. Unlike cash and cryptocurrencies, which allow anonymous transactions, CBDCs can have full traceability over most transactions. This would allow governments to know exactly how we spend our money and give them the ability to stop payments or confiscate them, as happened with the truckers’ protests against the Canadian government.

Cash and financial freedom. The increasing digitisation of money, driven by CBDCs, could mean the end of the use of cash, an important method of payment in many societies. This would not only affect the freedom to choose the means of payment but would also have implications for people with limited access to these technologies. In this respect, the ECB states that the digital euro would be a complement to cash, not a substitute, so banknotes and coins will remain in circulation.

Negative impact on commercial banks. The use of CBDC could negatively affect the financial intermediation now provided by commercial banks, as citizens may prefer to keep their money directly in digital accounts managed by the central bank, especially in times of crisis. This would reduce the role of commercial banks, affecting their ability to offer loans, credit, and financing.

11Onze Recommends Bitvavo, cryptocurrency trading made easy, safe and at a reasonable cost.