The development of CBDCs is caught in a tempest of differing opinions.
While some see it as “the end of freedom,” favoring the developments of DeFi and stablecoins instead, others support the evolution of the monetary system to meet the needs of an increasingly digitized community.
Nevertheless, central banks worldwide strive ahead, determined to explore the possibilities and potential use cases.
ECB selects private sector collaborators
Last month the ECB announced a selection of five companies to assist in developing potential user interfaces for the prototype of the digital euro.
With the focus of this news primarily on the development of a retail CBDC, the interfaces will address each area of the consumer experience. Located in different jurisdictions of the Eurozone, the companies were selected as such:
peer-to-peer online payments – CaixaBank;
peer-to-peer offline payments – Worldline;
point of sale payments initiated by the payer – EPI;
point of sale payments initiated by the payee – Nexi;
e-commerce payments – Amazon.
Despite some mild grumblings about using Amazon within the selected companies, the development was encouraging news to the CBDC development community.
“It is necessary to leverage insights from both the public and the private sectors,” said Jonas Gross, Chairman of the Digital Euro Association. “I welcome that the ECB collaborates with the private sector on a prototype of the Digital euro.”
The resulting tests will be published in 2023, along with the findings of the ECB from their two-year investigatory phase.
“I think the European Central Bank is doing a fabulous job on the digital Euro,” said Richard Turrin, author of Cashless. “I think they are to be commended for the regular amounts of updates that they’re putting out telling the European citizens what they’re doing.”
However, many still ask within this landscape, why develop a CBDC when stablecoins are already making steps?
Why use CBDCs when there are stablecoins?
Increasingly, stablecoins such as USDC are being used in day-to-day life. Certain companies are offering wages, and multiple financial products are being developed using the apparent stability of cryptocurrency.
Even in the context of Europe, Circle, the issuers of USDC, have been making steps, issuing a EUROC in June 2022, which will be pegged to the euro.
This has called many to question the usefulness of a CBDC (“both are stable digital currencies, right?”).
According to experts, the idea of such a comparison is preposterous. Turrin explained that the level the interfaces needed for a CBDC to be accepted by the majority of a population would require a vast amount of development, lightyears away from the level DeFi is currently working at.
“It is absurd to compare the rollout of the digital euro, which will become the national currency, which is universally accepted at all stores, all businesses, and by everyone in an entire nation, to the adoption of stablecoins,” he said. “None of these stablecoins have yet had significant enough global adoption to make claims that they can carry the payments of a nation or multiple nations.”
Gross agreed, “Stablecoin projects are easier to implement and have started earlier concrete product developments. CBDCs will become legal tender, bringing major regulatory changes.”
Handing off data control to protect privacy
Many are wary of CBDCs due to a perceived loss of privacy. Last year, Politico commissioned a survey of the British public, which found that 70% of respondents were concerned about a loss of payment privacy.
In the US, concerns are also significant, and the Federal Reserve sparked outrage at an announcement that the Digital Dollar “will not be anonymous.”
Rumors that the government issuing the CBDC will use it to control spending are rife, with many taking to social media to oppose its implementation.
The ECB also announced that third parties would handle all the data surrounding their resulting CBDC. They say this will allow the Digital Euro to “provide a level of privacy equal to that of current private sector digital solutions.”
In his public statement, Fabio Panetta, Member of the Executive Board of the ECB, said, “Holding a digital euro would mean holding a direct liability of the central bank – as is the case with banknotes today. This means…the Eurosystem would be liable for any mistake made in digital euro settlement.”
He explained that the Eurosystem would need complete control of the settlement with intermediaries. However, the intermediaries would control the distribution of the CBDC.
“This is fully consistent with safeguarding the privacy of end users. We can design the digital euro to ensure that the Eurosystem only processes data to settle transactions with no possibility to track payments sent or received by any specific user.”
Validation would therefore be done by third parties such as banks, which already handle KYC with their own customers.
“They scored big time telling people they are going to look to third parties to validate the digital currency transactions,” said Turrin after covering it extensively in his newsletter. “What that means is they’re going to keep their hands off the data and push it to banks.”
He explained that by doing this, the ECB may have commanded the support of commercial banks and avoided public controversy around privacy.
“Banks have the KYC and already do financial transactions,” he continued. “If the ECB doesn’t have the data, they can’t be accused of “spying.” It takes the wind out of the sails of many of the arguments against CBDCs.”
This could go a long way to achieving a greater adoption of the resulting CBDC by the general public. However, in doing this, Turrin explained, they may have reduced peer-to-peer capabilities.
In the ECB’s announcement, they stated that although they would examine offline capabilities for individual validation, the process is likely to take longer than third-party validators such as banks due to uncertainties over technology and security.
With over five years in the art and design sector, Isabelle has worked on various projects, writing for real estate development magazines and design websites, and project managing art industry initiatives. She has also directed independent documentaries on artists and the esports sector.
Isabelle's interest in fintech comes from a yearning to understand the rapid digitalization of society and the potential it holds, a topic she has addressed many times during her academic pursuits and journalistic career.