Central Bank Digital Currencies (CBDCs): Prospects for Europe

Since the nineties, central banks have been exploring the possibilities of digital currency, beginning with Finland’s Avant e-money card, launched in 1993. This invention didn’t make it far past the beginning of the new millennium, but many today still view it as the first central bank digital currency (CBDC), even if it wasn’t described as such at the time.

Cut to 2014. China began researching a CBDC of their own, while some ten thousand miles away, Ecuador launched a mobile-based digital currency, ‘Dinero Electrónico.’ This concept only accelerated in growth over the years until now, a decade later, the phrase ‘central bank digital currency’ has entered common parlance. According to the Central Bank Digital Currency Tracker, over 130 countries and currency unions are currently researching CBDCs, including a host of European nations.

But what exactly are CBDCs? What is their current status in Europe, and how might that status develop going forward? Finally, what implications might these digital currencies have for businesses and consumers? These are the questions this article sets out to answer.

What Are Central Bank Digital Currencies (CBDCs)?

A CBDC can most easily be described as the digital form of a nation’s fiat currency — that is, a currency without an intrinsic value of its own that is both backed and issued by a government.

Historically, fiat money has been issued in the form of coins and notes, though credit and debit cards have existed in one form or another since the 60s and 70s, respectively. Physical money has seen a drop in usage in a number of developed countries, particularly since the pandemic, with people opting to use credit cards, debit cards, and e-wallets instead.

This shift, along with a growing interest in blockchain technology, has prompted many countries to explore the potential of adopting CBDCs as a digital alternative.

What Is the Purpose of CBDCs?

There are many potential uses for CBDCs, but in this article, we are going to explore a few of the most important ones.

The primary purpose of CBDCs is to provide easy access to financial services. In 2022, the World Bank published a report estimating that around 25% of the global adult population is ‘unbanked’ — i.e., unable to access a bank account or use a mobile phone to send and receive money. This surprising figure highlights the need for accessible financial solutions, which is where CBDCs come in. A CBDC would allow unbanked individuals an easily accessible method for receiving, storing, and sending currency.

However, accessibility and financial security aren’t the only things CBDCs can offer. As crucial as they are, these digital currencies also provide both businesses and consumers with privacy and convenience. Supported by state-of-the-art encryption technology, CBDCs will be safe and easy to transfer both between banks (wholesale CBDC) and between businesses and consumers (retail CBDC).

Another benefit of CBDCs is that they may help to reduce the maintenance costs associated with current financial systems — for example, by decreasing cross-border transaction fees.

The Current Status of CBDCs in Europe

Different countries within Europe are at different stages in the CBDC implementation pipeline. Hungary and the Czech Republic are both still in the research phase, while the United Kingdom, Norway, and Belarus are in the development phase. With the exception of Denmark, for whom CBDC is currently inactive, all other European countries have successfully reached the pilot stage.

Currently, the majority of European nations plan to support either retail CBDCs or both retail and wholesale CBDCs together, with a minority opting for wholesale adoption only.

In July 2021, the European Central Bank began its digital euro project — a CBDC for use in the Eurozone. As of November 2023, this project has been in its two-year preparation phase, during which partners will be selected, and the digital euro will be tested. Before the digital currency can go live, however, the regulations surrounding CBDCs must be greenlit by the European Parliament and Council.

To summarise, it is difficult to give a cohesive picture of the status of CBDCs in Europe as a whole, as this varies from country to country. With that being said, one thing is clear: the age of centralised digital currencies is right around the corner.

What Implications Might CBDCs Have for Businesses and Consumers?

The implementation of CBDCs will represent an era of opportunity for both businesses and consumers alike — but, equally, it will come with its challenges.

First, there are difficulties surrounding the widespread adoption of CBDC. Technological and regulatory challenges aside, public education must be put into place to establish trust in digital currency before it can be considered a viable alternative to traditional fiat money. Many people have also expressed doubts about putting central banks in control of their money, wary of what this may imply later down the line. Finally, there are concerns about CBDC’s impact on financial stability and, therefore, its effect on welfare at large.

With that being said, there are plenty of benefits to businesses and consumers, including efficient and secure bank access and direct use of a country’s central bank. CBDCs will also help streamline finance by enabling peer-to-peer transactions and eliminating the need for third-party involvement. This will not only decrease transaction time but also the associated costs.

Conclusion

CBDCs hold a lot of promise for the future — but, one way or the other, introducing them invites significant change. It is easy to see why so many governments within Europe have set aside such significant amounts of time to research and development before deploying this new technology.

However, with so many governments developing CBDCs and with central banks in Jamaica, Nigeria, and the Bahamas already having launched their own, it seems that widespread adoption in Europe is inevitable. While we can guess the impact this momentous change will have on European businesses and consumers, it is impossible to predict such a thing with total accuracy.

As the saying goes, however, progress is inevitable — and central bank digital currencies are a part of it.