Education

CBDCs in the European Spotlight

Published on December 20, 2023

As we step into 2024, the journey of Central Bank Digital Currencies
(CBDCs) unfolds with intriguing developments, reshaping the economic identity
of nations. Two recent reports shed light on the divergent paths taken by
central banks, emphasizing the critical choices between retail and wholesale
CBDCs.

Norway’s In-Depth Exploration

Norway, a pioneer in CBDC research, recently disclosed the outcomes of
its fourth-phase experiments, signaling a cautious approach. While ruling out
an immediate need for a retail CBDC, the focus shifts to a wholesale CBDC for
interbank settlement of tokenized deposits. The fifth phase, set to conclude in
late 2025, aims to equip the central bank with the necessary insights for a
definitive decision. Key deliverables include fundamental CBDC requirements,
detailed specifications, regulatory frameworks, and a comprehensive launch
plan.

Norges Bank remains vigilant against risks such as currency substitution
and diminished control over payment systems. Concerns encompass potential
cryptocurrency adoption, BigTech payment threats, and even the prospect of
Norwegians embracing the digital euro. The paper contemplates leveraging the
digital euro infrastructure, revealing a delicate balance between collaboration
and concerns over dependency.

In the realm of technology, Norway’s testing phase utilized Hyperledger
Besu and explored interoperability between different blockchain technologies,
demonstrating a nuanced understanding of diverse applications like
programmability, mass payments, and machine-to-machine transactions.

European Crossroads: Retail vs. Synthetic CBDCs

Simultaneously, the broader European landscape is witnessing a profound
divergence in CBDC strategies, exemplified by the European Central Bank (ECB)
and counterparts like the Bank of England (BoE) and the Swiss National Bank
(SNB). The essence of this strategic divergence lies in the choice between
retail and synthetic CBDCs, reflecting distinct worldviews on governance and
value systems.

The BoE and SNB advocate for a synthetic CBDC, fostering innovation by
granting private entities access to central bank reserves while avoiding direct
retail service. This model aims to mitigate operational risks for central banks
and spur growth through competition.

In contrast, the ECB aligns with a retail CBDC approach, mirroring
China’s digital yuan design. Despite benevolent intentions, concerns arise
regarding potential disruptions to market dynamics and Western economic
principles. The ECB’s digital euro envisions free access for everyone, raising
questions about the implications for competition, innovation, and public
institutions.

Navigating Philosophical Crossroads

As Europe stands at this crossroads, the choice between retail and
synthetic CBDCs extends beyond a financial matter; it’s a philosophical
reflection on the role of competition, innovation, and public institutions in
shaping the future of money. The path chosen will influence the landscape of
innovation, economic growth, and market competition on a global scale.

In 2024, the unfolding CBDC narrative extends beyond a mere financial
saga, actively contributing to the intricate fabric of Europe’s economic
identity. As central banks navigate uncharted terrain, a nuanced approach that
balances trade-offs and fosters collaboration between the public and private
sectors becomes imperative for a resilient and innovative European monetary
future.