Menno Broos and Ria Roerink from De Nederlandsche Bank delve into key aspects of retail CBDCs, including the distinction between private and public money and the desired features of digital cash.
Building on our previous CBDC instalment where payments expert Piet Mallekoote explored the digital euro, this time Menno and Ria provide insights from a central bank's standpoint, offering a broader understanding of the role of retail CBDCs.
Despite the general public's lack of awareness regarding the distinction between private and public money, the latter plays a crucial role in underpinning trust and upholding essential public objectives in the retail payment system.
With the diminishing use of public money, represented by physical banknotes and coins, there is a need for a digital equivalent.
Digital cash should safeguard public objectives in retail payments such as privacy, inclusion, continuity, and autonomy.
The ongoing negotiations surrounding digital euro legislation should prioritise achieving these public objectives. Unquestionably, political support for this new form of public money is indispensable.
An American one-dollar bill is green, a Chinese one-hundred-yuan note is red and a twenty-euro note is blue. Although we are all so familiar with banknotes and coins, many do not fully grasp the unique nature of these notes. Essentially, banknotes represent public money and constitute the liabilities of a central bank. In contrast, funds deposited in a commercial bank or stored as e-money in a digital wallet fall under the category of private money, serving as liabilities for commercial entities.
The distinction between public and private money is crucial, yet often overlooked by the average consumer, and this is understandable for several reasons. Firstly, in day-to-day transactions, public and private money are seamlessly interchangeable, rendering the difference practically inconsequential. Secondly, the existence of financial safeguards, such as deposit guarantee schemes, means there is no immediate financial need for consumers to be highly attentive to this fundamental difference.
The unfamiliarity with the distinction between public and private money presents a challenge when communicating to the public the importance of exploring the concept of public money in a digital format, commonly referred to as central bank digital currency (CBDC). Frequently, the proverb 'If it ain't broke, don't fix it' dominates discussions on CBDC developments. However, such perspectives are myopic. Throughout history, financial stability has consistently relied on the presence of public money. The ability of individuals to convert their commercial bank deposits into public money forms the bedrock of trust in our financial system based on fiat money. In societal terms, the payment system holds comparable significance to essential utilities such as water, gas, and electricity networks. It would therefore be undesirable if public money were unintentionally to fade from daily transactions, thereby compromising its crucial role as an anchor of trust and guardian of public objectives. Public money should complement private means of payment, which we value for obvious reasons.
The digitalisation of the economy means cash usage is declining everywhere. In the Netherlands and Finland – leaders in digitalisation in Europe – cash usage at the point of sale has declined from 60% of payments a few years ago to around 20% today (Figure 1). Therefore, the role of public money is declining and CBDCs are an essential step to put public money on par again with commercial money in the current era of digitalisation.
Figure 1. Share of payment instruments used at the POS
Number of transactions in 2022 in euro area, per country
Source: ECB
Much like the varied hues of banknotes, central banks harbour diverse motives and objectives when delving into CBDCs. From our perspective, the primary aim of a central bank's CBDC endeavours should centre on safeguarding public interests in the digital age, mirroring the way physical cash upholds values such as privacy, inclusion, resilience, and autonomy.
In an increasingly digital landscape where online activities leave digital traces, CBDCs should play a pivotal role in preserving people’s privacy, a basic human right. It should promote inclusivity and ensure universal access to the payment system, catering to those without a bank account. As a fallback option, CBDCs help to maintain a resilient payment system, offering steadfast continuity as a cornerstone for the economy. Lastly, a public objective should be to attain sufficient autonomy and independence from foreign, private (tech) entities that might exert dominance in retail payments.
The development of retail CBDCs is in various stages across the world. In Europe, the European Central Bank (ECB) completed the investigative phase in October 2023. The next steps involve engaging in experiments and conducting additional technical work, awaiting a decision from the European legislator regarding the proposal for the digital euro. The issuance of a digital euro by the ECB hinges on crucial political support, emphasising the need for approval before a new form of public money can be introduced.
On a political level, the European Commission is proposing to accord legal tender status to the digital euro. This designation implies that merchants are obligated to accept the digital euro, except for micro-enterprises that currently do not accept other forms of digital payments. The draft legislation requires banks to offer their clients a digital euro wallet upon request, while also providing them the option to open a wallet with a different service provider. To prevent a digital bank run during periods of turmoil, holding limits are proposed. The digital euro should be non-remunerated, mirroring the absence of interest on traditional banknotes and coins. Importantly, the legislation underscores the necessity for an offline digital euro, designed to function independently of internet connectivity. This offline capability aims to offer enhanced privacy compared to online digital payments.
The digital euro will complement banknotes and coins, which should remain widely accessible and accepted. In the context of ongoing digitalisation, however, the digital euro legislation is an additional instrument to serve public policy goals in payments, delivering tangible benefits to society.
About Menno Broos
Menno Broos is programme lead of the digital euro team at De Nederlandsche Bank, the central bank of the Netherlands. He is also a member of the European Central Bank’s project steering group for the digital euro.
About Ria Roerink
Ria Roerink works at De Nederlandsche Bank as a senior policy advisor in retail payments. She is specialised in themes such as CBDCs, market organisation and regulation, incentive structures, and public private partnerships.
About De Nederlandsche Bank (DNB)
DNB is the Dutch central bank, financial sector supervisor and resolution authority. DNB is committed to a stable financial system: stable prices, solid financial institutions, and properly functioning payment transfers. In the fulfilment of all its tasks, DNB puts into practice its mission: working on trust.
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