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Posts Tagged ‘Digital Euro’

The Dangers Lurking behind a Digital Euro | Mises Wire

Posted by M. C. on February 27, 2021

Thorsten Polleit

Neosocialist China does it, Sweden does it, and many other states want to do it, too: to issue digitized central bank money for everyone. The European Central Bank (ECB) is also working on such a scheme. It wants to launch “digital euro central bank money” as soon as possible. Many economists praise the project as an “innovation,” as an important and indispensable step in an increasingly digitized world.

The ECB is also keen to make its intentions known, declaring that a digital euro will be accessible for everyone, robust, secure, efficient, and compliant with applicable law. However, it should be clear that the path to becoming a surveillance state regime will accelerate considerably if and when a digital euro is issued. But let’s not get ahead of ourselves.

A digital euro is not “better money” than the euro that is already in circulation today. The planned digital euro is fiat money, just as much as euro cash and euro bank balances represent fiat money: they are all created “out of nothing” by the ECB, which has the monopoly of euro production. Just as is the case with the existing euro, the quantity of digital euros can be increased at any time, it is backed by nothing, and the digital euro carries a 100 percent risk of devaluation. As noted earlier, a digital euro would be a fiat euro.

The digital euro can either be “account based”—you keep it in an account held with the ECB—or it can be “token based”—money users receive a “token” that can be transferred from smartphone to smartphone via an app. Hoping for “anonymity” in payment transactions would be futile in both cases, one has to fear.

A look at China probably shows where the journey is headed: the Chinese digital central bank money is supposed to have a “controlled anonymity.” In other words, “only” the People’s Bank of China—that is, the Chinese Communist Party—should have access to the payment transaction data.

The ECB says the digital euro is a “complement” to cash and bank balances. But that’s not convincing. Because those who pay in cash obviously find it convenient and want to ensure their anonymity. Otherwise, they would pay electronically, i.e., transfer balances through PayPal, Apple Pay, or debit or credit cards.

In this context, it should be noted that people don’t just hold cash for payment purposes. They also demand it to protect themselves against bank failures, for example, or they also hold cash to be liquid even in the event of power outages, to be independent of online banking.

That said, the suspicion that the ECB is more interested in taking cash out of circulation cannot be refuted easily. But if only electronic payments are possible, what little remains of “financial privacy” will be gone. The citizen becomes completely transparent, much to the liking of the state and its beneficiaries.

As soon as cash has been pushed back or stripped away entirely, monetary policymakers can implement an uninhibited negative interest rate policy to devalue debt. Customers can no longer get out of the “bank balance sheet”; the final escape door is then locked. 

It is unlikely that a digital euro will prevail naturally against cash. Rather, the ECB will have to make the use of cash unattractive: by raising the costs of cash by increasing fees at ATMs or through upper limits for cash payments, or through social stigmatization of cash (keywords: money laundering, terrorist financing, etc.).

The digital euro does not compete with crypto units such as bitcoin. After all, a digital euro is—as already mentioned—fiat money issued by the state, which is exactly what all those who are looking for better money do not want to hold.

Rather, the target group for the digital euro includes those who are basically content with the euro as it currently is and those who are worried about a potential banking crash. This group probably represents a fairly large number of people who come into question as a potential target clientele for the digital euro.

The plan is to allow for a 1:1 exchange of euro cash and commercial bank balances with digital euros. Economically speaking, this means that the ECB de facto insures the liabilities of the euro banks: the ECB transfers its creditworthiness, which is beyond any doubt stellar, to euro commercial banks.

With a 1:1 exchange option nobody has to worry about losing their money balances held at euro commercial banks, as the ECB has the monopoly of euro production. The ECB cannot go bankrupt; it can create euros at any time to settle its payment obligations, regardless of the amount.

That said, no one needs to worry that their balances held at a commercial bank could be lost if the bank goes bankrupt and the deposit protection fund fails. If a digital euro is publicly accepted, the scenario of euro commercial banks collapsing becomes unlikely; the euro money and credit system would be supported more than ever by the omnipotence of the ECB.

As is well known, in their Communist Manifesto (1848) Karl Marx and Friedrich Engels named ten “measures” the implementation of which would lead to communism. The fifth measure reads as follows: “Centralisation of credit in the hands of the state by a national bank with state capital and exclusive monopoly.” The issuance of a digital euro and the resulting consequences are undoubtedly another crucial step in bringing the Marxists’ vision of their desired revolution to fruition. Author:

Thorsten Polleit

Dr. Thorsten Polleit is Chief Economist of Degussa and Honorary Professor at the University of Bayreuth. He also acts as an investment advisor.

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Central Bank Digital Currencies and the War on (Physical) Cash | Mises Wire

Posted by M. C. on December 7, 2020

At the end of the day, central bank digital currencies are all about control, not meeting consumer demand. The ECB admits as much at several points in their report. Here is just one instance: If people are really demanding a digital euro, why would it have to be assigned legal tender status in order for it to be accepted, as the authors of the report clearly state would be necessary (p. 33)? The only scenario where introducing a CBDC makes sense is in order to phase out the use of physical cash in order to be able to impose whatever negative interest rate regime the central bankers in charge judge necessary. Helicopter money, restrictions on cash holding, and negative interest rates are all part of the bundle of desirable policies that can only—or most easily—be achieved with digital currencies fully controlled by the issuing central banks.

Kristoffer Mousten Hansen

Twenty twenty is a year dominated by bad news. While governments around the world have imposed extremely destructive restrictions on economic life and promise a “Great Reset” that amounts to a great leap forward into the socialist future, central bankers have advanced plans for implementing central bank digital currencies (CBDCs). These may arrive as early as next year. Yet what is the motivation behind this innovation? Reports recently published by the Bank for International Settlements1 and the European Central Bank2 provide part of the answer. These publications provide fascinating insight into the theories and ideologies driving central bankers in their pursuit of CBDCs.

Monetary Policy? Moi?

One perhaps surprising theme in both reports is the disavowal of any monetary policy behind plans for introducing CBDCs. The BIS report claims that “[m]onetary policy will not be the primary motivation for issuing CBDC” (p. 8) and the ECB report notes that a “possible role for the digital euro as a tool to strengthen monetary policy is not identified in this report” (p. 3). One might first of all suppose that introducing a new form of money would by definition amount to monetary policy, at least in a broad sense, and secondly perhaps find it a tiny bit weird that institutions dedicated to researching and implementing monetary policy would not have considered the potential effects of a new form of money in light of its effects on policy. But what is really striking is that both reports—and especially the one issued by the ECB—at great length detail the implications for monetary policy of CBDC. True, they say they don’t, but looking beyond the executive summary and paying attention to what is written in the report itself puts the lie to that claim.

In order to see this, we only need to look at the key features the central bankers identify as desirable in a CBDC: it should be interest bearing, and it should be possible to cap how much each individual can hold. Both measures are clearly aimed at supporting monetary policy. The cap on holdings forces people to spend their money, driving either price inflation or investment in financial assets, and by making the CBDC interest bearing (or remunerated, in the language of the ECB) it becomes a tool of setting and passing on policy rate changes, including negative interest rates.

The ECB’s Report on a Digital Euro in particular goes on at great length about the need to limit or disincentivize “the large-scale use of a digital euro as an investment” (p. 28). The reasoning behind this position is crystal clear: since monetary policy has driven interest rates into negative territory, the ECB should not allow large-scale holding of digital euros, since investors would then, quite sensibly, chuck their holdings of negative-yielding bonds and seek a safe haven in digital euros—that is, if they can hold them at no cost. Similarly, the ECB is averse to letting people convert their bank deposits into digital euros (p. 16), which would reside in their individual wallets rather than in a bank account. Indeed, the horror of what the BIS and ECB reports call “financial disintermediation” looms large in the minds of central bankers: if people keep their money outside of banks, these will have less money to lend out, thereby increasing borrowing costs. In the words of the BIS report, they are concerned that

a widely available CBDC could make such events [i.e., bank runs] more frequent by enabling “digital runs” toward the central bank with unprecedented speed and scale. More generally, if banks begin to lose deposits to CBDC over time they may come to rely more on wholesale funding, and possibly restrict credit supply in the economy with potential impacts on economic growth. (p. 8)

Of course, Austrian economists since Ludwig von Mises3 understand that “financial disintermediation” can really be a blessing. In the context of digital euros, all it means is that people would hold the amount of cash they deemed desirable outside the banks. They would only make true savings deposits in banks, i.e., they would only surrender money that they did not want instant access to. Under such circumstances, banks would be incapable of expanding credit by issuing unbacked claims to money; they could only make loans out of the funds their customers had explicitly made available for that purpose. This would not only result in a leaner or sounder financial system, it would also avoid the problems of the perennially recurring business cycle. And contrary to what the central bankers fear, the supply of credit would not be restricted, it would simply be forced to correspond to the supply of real savings in the economy. This, unfortunately, is an understanding of economics completely alien to central bankers.

Negative Interest Rates

One aim in introducing CBDCs that is only hinted at is the possibility of imposing even lower negative interest rates. In recent years monetary economists4 have increasingly discussed the problem of the “zero lower bound” on interest rates: the fact that it is impossible to set a negative interest since depositors in that case would simply shift into holding physical cash. When manipulating the interest rate is the main policy tool of central banks this is obviously a problem: How can they work their alchemy and secure an acceptable spread between the main policy rates and the market rate of interest when interest rates are already very low? Allowing for the cost of holding physical cash, –0.5 percent seems to be about as low as they can go.

With a centrally controlled digital currency this problem would disappear. The central bank could set a limit on how much each person and company could hold cost free, and above this limit, they would have to pay whatever negative interest rate (or “remuneration,” as the ECB insists on calling it) is consonant with central bank policy. In this way, holding cash would not obstruct monetary policy, as the cash holdings would be fully under the control of the central bank.

There is just one problem with using CBDC in this way: it only works if physical cash is outlawed. Otherwise, physical cash would still simply play the role it does today, i.e., as the most basic and least risky way of holding one’s wealth and of avoiding negative interest rates. The BIS report clearly identifies this problem (p. 8n7), as does the ECB (p. 12n18): a CBDC could help eliminate the zero lower bound on interest rates, but only if physical cash disappeared. So long as physical cash remains in use, the zero lower bound cannot be breached.

But the People Demand It!

However, people might of their own accord come to the rescue of the world’s central banks, sorely beset as they are by the zero lower bound. At least according to Benoît Coeuré, head of the BIS Innovation Hub (the group tasked with researching CBDC), plenty of people want a central bank digital currency. The ECB also sees the decline in the use of physical cash in favor of other means of payment as one of the main scenarios that would require the issue of a digital euro (p. 10).

Now, while some people might like CBDC, there is really no reason to believe, notwithstanding monsieur Coeuré’s anecdotal evidence, that there is widespread demand for central bank digital currency. The ECB admits as much when they write that physical cash is still the dominant means of payment in the euro area, accounting for over half the value of all payments at the retail level (p. 7). But Coeuré does not need to go far to see the continuing relevance of cash: in 2018 researchers at the BIS itself concluded that cash, far from declining in importance, was still the dominant form of payment.5 More recently, a study in the International Journal of Central Banking showed that cash usage is not only not declining, but even increasing in importance.6

Be that as it may, the central bankers are certainly right that there is an increased demand for digital payment solutions and for cryptocurrencies. However, it is erroneous to conclude from this that therefore a central bank digital currency is demanded. Demand for a payment solution is not the same as demand for a new kind of money. It simply means that people demand payment services that allow them to more cheaply transact with each other. Such services are plentifully provided by companies such as Visa, Mastercard, Paypal, banks, and so on and so forth. There is no reason to believe that central banks need to provide this service nor that they could do it better than private companies and banks, and it is simply a mistake to equate demand for such services with demand for a money.

The mistake in the case of cryptocurrencies is even more egregious. When people hold bitcoin or another cryptocurrency, it is not because their heartfelt demand for a CBDC has to go unfulfilled and this is their closest alternative. On the contrary, people want to own bitcoin precisely so they can avoid the negative interests imposed on the established banking system and the risks of holding inflationary fiat money. Introducing a CBDC would not mitigate those risks, but rather add to them, as the central bank would assume total control of the money supply through it and the attendant abolition of physical cash. The felt need for inflation hedges and the desire to escape central bank control, including as it does negative interest rates and caps on how much cash one could hold, would only increase.

It’s All about Control

At the end of the day, central bank digital currencies are all about control, not meeting consumer demand. The ECB admits as much at several points in their report. Here is just one instance: If people are really demanding a digital euro, why would it have to be assigned legal tender status in order for it to be accepted, as the authors of the report clearly state would be necessary (p. 33)? The only scenario where introducing a CBDC makes sense is in order to phase out the use of physical cash in order to be able to impose whatever negative interest rate regime the central bankers in charge judge necessary. Helicopter money, restrictions on cash holding, and negative interest rates are all part of the bundle of desirable policies that can only—or most easily—be achieved with digital currencies fully controlled by the issuing central banks.

Ironically, far from buttressing the role of central banks and government fiat money, imposing a CBDC may have the completely opposite effect. Replacing physical cash with a CBDC would only strengthen the undesirable qualities of fiat money and further hamper a free market in money and financial services, increasing the demand for alternatives to government money, such as gold and bitcoin.

  • 1. Bank of Canada, European Central Bank, Bank of Japan, Sveriges Riksbank, Swiss National Bank, Bank of England, Board of Governors of the Federal Reserve, and Bank for International Settlements, CBDC: Central Bank Digital Currencies: Foundational Principles and Core Features (N.p: Bank for International Settlements, 2020),
  • 2. European Central Bank, Report on a Digital Euro (Frankfurt am Main: European Central Bank, October 2020),
  • 3. Ludwig von Mises, The Theory of Money and Credit, trans. H. E. Batson (New Haven, CT: Yale University Press, 1953), p. 261ff.
  • 4. See, e.g., Marvin Goodfriend, “Overcoming the Zero Bound on Interest Rate Policy,” Journal of Money, Credit and Banking 32, no. 4 (2000): 1007–35.
  • 5. Morten Bech, Umar Faruqui, Frederik Ougaard, and Cristina Picillo,”Payments Are A-Changin’ but Cash Still Rules,” BIS Quarterly Review (March 2018): 67–80.
  • 6. Jonathan Ashworth and Charles A.E. Goodhart, “The Surprising Recovery of Currency Usage,” International Journal of Central Banking 16, no. 3 (2020): 239–77.


Kristoffer Mousten Hansen

Kristoffer Mousten Hansen is a research assistant at the Institute for Economic Policy at Leipzig University and a PhD candidate at the University of Angers. He is also a Mises Institute research fellow. 

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