The Breakdown - The European CBDC Debate Heats Up

Episode Date: November 30, 2023

Plus a broader look at CBDC efforts around the world. Today's Sponsor: Kraken Kraken: See what crypto can be - https://kraken.com/TheBreakdown Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture Power Shifts remaking our world. What's going on, guys? It is Wednesday, November 29th, and today we are catching up on CBDCs. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown. Hello, friends. Well, today we are returning to a topic that has come and gone as a major area of focus, but always looms large just around the corner, and which we've seen over the course of the last year, has strangely become a more significant political issue, particularly

on the American right, than I think many people would have expected. What we're talking about, of course, is central bank digital currencies, CBDCs, which have taken on a place in the political discourse that is far beyond just digital assets, or even money general. Now, among major Western currencies, the euro is the farthest along in the push to issue a retail CBDC. Enabling legislation is currently being debated in Parliament, and the initiative has received strong backing from the European Central Bank. In multiple Western and Asian nations, wholesale CBDCs are actively being tested in advanced stage pilot programs and small live experiments. By and large, wholesale CBDCs have been relatively uncontroversial. In practice, they simply

function as an upgrade to existing banking infrastructure to improve speed and reduce costs by using some elements of blockchain technology. There's even an argument to be made that the Federal Reserve's new Fed Now clearing system looks similar to wholesale CBDCs in other regions. Retail CBDCs, on the other hand, are an entirely different story and have been the subject of a huge amount of consternation over the past few years. Unlike wholesale CBDCs, which are only used by institutions for back-end operations, retail CBDCs are designed to be a digital representation of cash to be used by everyday people. Digital cash issued by the central bank carries with it a number of major concerns for free and open societies. These include privacy risks, permission spending, and overall

government control of commerce. While these risks are sometimes dismissed as conspiracy theories, they have all been acknowledged by national and international regulators as design considerations for retail CBDCs. So, some recent specific news. The design of the European retail CBDC, known as the digital euro, was debated in a two-hour public hearing on Tuesday. The process of process of drafting legislation for a digital euro has been ongoing for months and remains highly controversial among lawmakers. The risks of giving the ECB increased control over the currency have been clearly articulated in debate and public comment. However, the major sticking point for dissenting lawmakers has been that no one seems capable of explaining exactly why

bringing in a digital euro is necessary. Most European countries already have highly advanced digital payments networks and access to banking is a relatively small issue in the region. The closest that pro-CBDC policy makers have come to explaining the need for a digital euro is by explaining that the use of cash is dwindling. They claim that as cash becomes a less important part of payments, a digital form of central bank money is important to ensure that the ECB can maintain control of the currency. The theory is that commercial banks will form a monopoly on currency supply if current trends continue. Tuesday's hearing ratcheted up the controversy.

Testimony was heard from four experts, many of whom disagreed with current proposals on a number of major topics, alongside general concerns. concerns about state control and privacy, more specific design concerns have centered on a proposed holding limit of 3,000 euros. Italian economist Ignacio Angeloani had published a paper for the European Parliament earlier this year entitled Digital Euro, when in doubt, abstain, but be prepared. He gave the overview of his position stating that, the arguments on balance today would not favor such a decision to issue a CBDC in my view. An invasive form of public intervention like this one would be justified only if clear evidence were to emerge of malfunctioning in the present system.

But this is not in sight at the moment. Former Bank of Spain, Governor Miguel Fernandez immediately pushed back on this view. He suggested that because CBDCs are issued by the central bank, they could help end banking crises in Europe, which have caused commercial banks to be unable to repay depositors in the past. Ordoniaz said, digital euros are euros, but bank deposits are not euros. Deposits are just promises to pay euros, and if banks can't fulfill those promises, then you get crises emerging.

Another benefit proposed by Ordonez was the prospect of the complete deregulation of banking in Europe. His view is that by giving citizens direct access to central bank money, there would be no need for prudential controls or deposit insurance for commercial banking. Ordonia said, deregulation would have a very important impact on growth because banking is the most protected sector. The sector is subject to the most intervention of all economic sectors. Completely oblivious to the concerns about increased state control enabled by a CBDC, Ordonia has discussed the benefits of allowing the ECB to conduct direct monetary policy. He said, quote, so the central bank wouldn't have to change interest rates, and we will be able to take monetary policy decisions

without having to worry about the impact on banking stability. There are other effects, for example, dealing with the centralization of financial decisions or separating monetary policy from government finances. And there's a very important effect for Europeans because if we had a digital euro, then we could have real European monetary union. What we have at the moment is just physical money coins notes. Vicki Vanek, the executive director of Positive Money Europe, assured lawmakers that the goal was not to destroy commercial banking. She advocated the gradual removal of the proposed 3,000 euro holding limit to ensure the deposit flight from the banking system is controlled.

She said, quote, we don't think that we can jump from bank deposits to suddenly central bank digital currency with no limits. We have no interest in seeing the banking system crash. But we do think that a temporary holding limit that is gradually lifted through stress tests and research is the correct way to go. Banks had initially pushed for a 60 euro limit to give an indication of how serious their concerns about deposit flight are. Angelooney pushed back on the idea that a CBDC would increase.

financial stability. He said that while the contractionary effect on bank deposits would depend on holding limits, any notion that a digital euro would bring more safety to the financial system was an illusion. Marike Van Berkel, the head of retail banking payments and digitalization at the European Association of Cooperative Banks, how's that for a title, echoed these sentiments, stating that the more customers you have, the bigger the problem becomes, which is also the case of cooperative banks. Many European economies rely on networks of cooperative banks to drive regional growth in small enterprise, so understanding this risk properly seems like kind of an important thing. Today's episode is brought to you by Cracken. For far too long, the whole financial system has been

standing still, too slow, only on for certain hours, overly designed for some types of people, but not for others. Crypto, at its best, represents progress. It asks the question, what if? It invites people in instead of leaving them out. It's on 24-7-365. It's on 24-7, 365, and moves at the speed of real life. Not everyone believes it. We've got our fair share of detractors, but that's the way it always is when you're building something new. Cracken is a crypto company that has been through the highs and lows of the industry,

facing forwards towards progress throughout. And now they're inviting us to see what crypto can be. Learn more at crackin.com slash the breakdown. Disclaimer, not investment advice. Crypto trading involves risk of loss. Cryptocurrency services are provided to U.S. and U.S. territory customers by Payward Ventures Inc. PVIB.B.C. Krakken. Now, by far the biggest concern expressed by the public is that a digital euro would replace cash,

ensuring that all transactions are able to be monitored. The ECB has launched a multitude of campaigns over the last year to address those concerns, but they've largely treated the public outcry as unfounded and driven by conspiracy theories. One of the main topics during the hearing centered on debating the basic premise of whether or not cash was doomed it needed to be replaced. Ordoniaz said, what we're seeing is this gradual decline of the physical euro and people shifting to risky private digital currency, and that's one more reason why it's useful to have a public currency. Anglone retorted that countries like Norway and Sweden where cash use is low are exceptions to the

rule. He said, it's true that U.S. networks like MasterCard and Visa have high market shares in Europe, but their dominance is far from established in Germany and in Italy, for example. Anglone dismissed the premise that crypto use was gaining traction for European payments out of hand, stating that crypto and stable coins are very different assets. not used and they will not be used in the foreseeable future for payments. That's impossible. They're too volatile. They're too costly. So there is no danger in my view that crypto assets may compete with payments. Vanek highlighted offline payments as one of the critical features to ensure privacy. She said, the offline version of the digital euro is crucial as it is most able to mimic the anonymous

nature of cash today. The design and choice of technology for the offline version needs to be carefully chosen. European Parliamentary members Stefan Berger, who has been tasked with shepherding CBDC legislation through Parliament, noted the level of uncertainty still surrounding the technical design of the system. He said the Parliament, quote, doesn't know the technological aspects of a CBDC or if it's going to be blockchain. So, summing up this part of the conversation, it's clear that there is still a lot of debate and no consensus around the issues surrounding a CBDC, even in the region where the conversations are the most advanced. There are fundamentally different views on whether this is necessary and what features within it are required, and of course, that adds just more complexity

to the discussions. What's more, I don't think if you're a privacy advocate, it's particularly encouraging to see those concerns dismissed. It would be one thing to have them addressed, but they're not really being addressed. Instead, they're trying to be hushed away, swipe to the side, shown to be just the folly of an overactive imagination. If anything, I think that that's likely to make people take them more seriously as concerns. But, although the European Parliament appears split on whether to move forward with the digital euro, the ECB has made their position extremely clear. In late October, ECB president Christine Lagarde announced the beginning of the preparation phase for the digital euro. She said, the euro is key to our European unity. A digital

euro existing alongside cash would future-proof our currency. It would be safe, easy to use, and free of charge. While the decision whether to issue a digital euro will be taken later, we're now launching the preparation phase. During the announcement, Lagarde focused on dismissing public concerns stating, cash is here to stay, you will all have options, cash and digital cash, your euro, your choice. She emphasized that the ultimate decision to issue the digital euro is in the hands of the parliament, but said, quote, it will be a journey and we will walk the journey together with the legislator. Now, moving to another area that has been aggressive about their CBDC plans, in China, CBDC pilots continue to grow in scope.

On Monday, British multinational bank, Standard Chartered, announced that its Chinese subsidiary would be joining trials of the ECNY retail CBDC. The ECNY pilot program is now active across 26 cities and provinces, with 5.6 million merchants accepting the digital currency. Since the CBDC was launched in 2020, it has surpassed $250 billion worth of transactions with 120 million active wallets. The bank will allow its customers to purchase, exchange, and redeem ECNY using their bank accounts. Shao Lei Zhang, the president of Standard Chartered China, said,

As an international bank rooted in the Chinese market for 165 years, Standard Chartered is optimistic about the development prospect of a digital RMB. The bank said that its areas of exploration during the pilot will include cross-border merchant payments, trade financing, and supply chain financing. In a white paper published last week, the People's Bank of China had called for commercial payment processors to integrate the ECNY for consumer transactions. Now, very notably, last month, the ECNY was used for the first time to settle a cross-border oil deal. PetroChina International purchased 1 million barrels of oil from an undisclosed seller via the Shanghai Petroleum and Natural Gas Exchange. China Daily reports that cross-border use of the

ECNY is up 35% from last year, reaching 205 billion. As all this is happening, the Bank for International settlements have called on national governments to continue their work and preparing for CBDCs while dealing with concerns from citizens. The BIS is sometimes referred to as the Central Bank for Central Banks and sits atop the global banking system as an international standards and regulatory body. Speaking at an Atlantic Council CBDC conference in Washington, D.C. on Tuesday, BIS official Cecilia-Skingsley addressed privacy issues stating, central banks have no commercial interest in personal data, unlike the private sector.

Skingsley is the head of the BIS Innovation Hub, which is responsible for coordinating global CBDC research. Data from the BIS has clearly shown that privacy is the number one concern for citizens. A recent survey showed that participants' willingness to use a CBDC increased by 60% if privacy was assured. Skingsley noted that information on people's spending habits is currently protected by legal frameworks, a protection which she urged countries to retain when they decided to issue CBDCs. Despite the rising backlash against CBDCs, Skingsley encouraged nations not to shy away from the technical advance and digital money. She said,

Innovation usually takes us to new places and opens up possibilities that were not there until a new technology breakthrough has happened. Addressing perceptions that CBDCs could amplify bank runs, Skingsley said that the right provisions like fast-acting crisis management tools and limits on fund withdrawals could help control these issues.

Skingsley also claimed that wholesale CBDCs could be a, quote, game changer for cross-border payment, citing the success of BIS Innovation Hub projects. She said, quote, based on our findings, benefits from issuing a wholesale CBDC could include, operational transparency, faster settlement, and less risk. The BIS will soon publish the conclusions

from Project Torbulon, which proposes new privacy solutions for retail CBDCs. The newest BIS pilot involves a partnership with the World Bank and the Swiss National Bank to experiment with tokenization of development money for developing countries. I don't know, man, I don't think that these comments are really going to reassure anyone. And so at the end of the day, we're in the same place that we've been in for around the last three years. Governments have for a variety of reasons, some of which aboveboard, some of which less appealing to citizens, an interest in these sort of central bank digital currencies. Meanwhile, citizens have a completely legitimate concern that is not rooted just in conspiracy theory, that the powers that be given access to a vast trove of data are going to use

that data in ways that aren't necessarily what the citizenry would like, and in fact could even be a violation of individual rights. Meanwhile, the reassurance is things like, no, of course we're not going to do that, or it's just a bunch of conspiracy theorists saying this, or, as the BIS is pushing, that governments don't care about data. I think this was best summed up in a tweet by ZXY on Twitter that repeated the headline, Central Banks have no interest in personal data, BIS official says, while promoting CBDCs. ZXY added the comment, thank God I was worried. You see this lady peering over your garden wall. She asks for your last five years of credit card statements. She has a gun. What do you do? Of course, we will continue to watch the evolution of CBDCs.

these stories. But for now, that's the latest. And so with that, I want to say a big thank you one more time to the sponsor of today's show, Cracken. Go to Cracken.com and see what crypto can be. And until next time, be safe and take care of each other. Peace.