European CBDC plans reveal diverse worldviews and peculiar bedfellows

In 2023, a very interesting difference was revealed when European central banks publicly grappled with important choices for Central Bank Digital Currencies (CBDC): retail versus wholesale.

While these options look pretty good to the average citizen, the European Central Bank (ECB), along with the Bank of England (BoE) and the Swiss National Bank (SNB), have announced critical and revealing design preferences.

The choice between retail and wholesale CBDCs echoes very different worldviews about societal governance and value systems.

The BoE and SNB lean towards a synthetic model, mixing innovation with traditional financial stability, while the ECB finds an unlikely companion in China, which is embracing a retail CBDC – a digital euro designed in similar ways to China s digital yuan.

This difference in strategies not only reflects different societal values, but also paves the way for a competitive shake-up in the European financial sector in 2024 and beyond.

As the ECB comes under scrutiny over its retail CBDC approach, there are concerns that it could disrupt market dynamics and Western core economic principles. The CBDC design is more than a financial saga and there are crucial differences for each path.

What is behind a synthetic CBDC?

In 2023, BoE and the SNB revealed a trend towards a synthetic CBDC (sCBDC) approach.

First named by Tobias Adrian and Tommaso Mancini-Griffoli of the International Monetary Fund in 2019, sCBDC aims to promote innovation and growth by giving licensed private e-money issuers access to central bank reserves, so they can support customer-protected funds with risk-free public money.

This design outsources operation and management to private entities, yet provides the public with indirect access to central bank money.

This provides the security of central bank money, but frees central banks from servicing retail customers.

This mitigates inherent operational risks for central banks and avoids conflicts of interest, while at the same time fostering competition-driven innovation and growth.

This approach has also been proposed by prominent American scholars and recently in a paper by the Bank of International Settlement (BIS).

The road to slavery is paved with good intentions

In stark contrast to its non-EU counterparts, the European Central Bank (ECB) unveiled its CBDC plans in November 2023 to launch a retail Central Bank Digital Currency (CBDC), aligning its strategy with the Chinese approach for a retail CBDC.

According to the ECB, this digital euro is envisioned as “an electronic means of payment freely available to everyone.”

Proponents argue that this move is aimed at making public money readily accessible for digital payments over the next few years, improving convenience and promoting healthy competition within the European payments sector.

However, one cannot help but remember the warning words of Friedrich Hayek: “The road to servitude is paved with good intentions.” While the ECB’s officially stated goals seem benevolent, the potential consequences and broader implications warrant careful consideration.

The ECB’s plans for a retail CBDC have drawn criticism and mistrust from the public and lawmakers.

However, ECB President Christine Lagarde’s dismissive attitude to concerns – expressing the need to “address all the conspiracy theories” – highlights a possible lack of foresight in the wider implications.

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While the digital euro project has been compared to China’s digital yuan project and Beijing’s potential interest in increasing control over its citizens, the larger issue is how a retail CBDC would reflect fundamental Western values ​​regarding the role of public institutions in challenge a market economy.

Europe at a crossroads

While healthy market competition is recognized, in most Western societies, as a catalyst for innovation and economic growth, the prospect of an uneven playing field, discriminatory privileges and potential anti-competitive behavior pose significant threats to European innovation and economic growth that need is to support a digital euro that competes on the global stage.

What is proposed is essentially a central bank, armed with a monopoly on money creation and extensive regulatory powers over its competitors. It intends to enter the payment market with a “free” solution.

This sets the stage for a direct challenge to the private sector – a competition where the rules, regulations, fines, licenses and market access are determined by the very entity participating in the competition.

As we move into 2024, Europe now stands at a crossroads, and the choice between retail and synthetic CBDCs is not just a financial matter – it is a philosophical reflection on the role of competition, innovation and public institutions in shaping the future of money.

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As the continent navigates this uncharted terrain, an SCBDC invites a nuanced approach, balancing the trade-offs and fostering an ecosystem where public and private sectors work together for a resilient and innovative European monetary future.

The unfolding CBDC narrative of 2024 continues to not only redefine the future of crypto; it actively shapes the fabric of Europe’s economic identity.

Jón Egilsson is co-founder and chairman of Monerium. Before that, he served as the vice-chairman and chairman of the Icelandic Central Bank’s supervisory board from 2013 to 2017.

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