Are CBDCs intended to protect the fiat system?

The central bank’s digital currencies (CBDCs) are “an investment” to protect the current monetary system, according to a Swedish central banker who also claimed that cash will soon be obsolete.

Cecilia Skingsley. Source: riksbank.se

Speaking under “Forum on central banking” of European Central Bank (ECB) in Portugal on Tuesday, cecilia skingsleyfirst deputy governor of Sveriges Riksbanksaid it was necessary for central banks to develop CBDCs to meet public demand and keep pace with developments in the modern world.

“I see this as an evolution in the role of central bank, rather than a revolution,” Ms Skingsley said. She added:

“I think cash will disappear as a form of payment, that’s for sure.”

Central banks have no reason to issue banknotes only

Ulrich BindseilDirector-General for Market Infrastructure and Payments at the ECB, agrees with Mrs Skingsley and says that “there is no argument” that central banks should not go digital.

To support the idea that central banks are not obliged to issue cash, Bindseil said that

“To evolve over time means to accept [la] digitalisation of society, [et] reject the claim that central banks are natural issuers of banknotes solely because of their monetary responsibility. ”

The ECB official added that he sees efficient and reliable payment methods as “a foundation of modern society”, while suggesting that CBDCs will play a key role in this regard.

Privacy remains a key issue

Markus K. Brunnermeier, teacher atPrinceton Universitywho was also on the discussion panel, said that privacy was “one of the key points” in a CBDC.

“We need a certain level of privacy for people to accept a CBDC,” he said, admitting that cash remains the preferred payment method for private transactions.

“With cash, there is no ledger where you put anything,” he said, noting that this makes it fundamentally different from digital currency from a security perspective.

With digital currency, on the other hand, there are new opportunities such as interoperability, the ability to set up automatic payments, smart contracts, etc. make a high degree of privacy harder to achieve, he said.

He explained that if all ledgers are interoperable with a “meta-ledger”, there is “no privacy at all.” Therefore, it may be necessary to split a CBDC ledger for security reasons.

Brunnermeier went on to explain that protecting privacy in a CBDC-based system is ultimately a trade-off between surveillance for government and freedom for users.

“How much privacy will you give, how much freedom will you give, and what will be your ability to prosecute criminals?” It is “a huge challenge we face,” he said.

As for which countries will be the first to introduce CBDCs, the Princeton professor argued that smaller countries and emerging economies are likely to trade faster than the US, home to the current reserve currency.

He explains that small countries are concerned about the huge reach of some large technology companies working with payment systems, such as Tencent and Ali Baba in China.

The platforms built by these companies make it easy to use any currency anywhere in the world, which “scares small countries and emerging economies,” he said.

According to Brunnermeier, this is why these smaller countries “are at the head of the CBDCs”, in order to protect their currencies from being taken over by larger currencies. “They could lose their monetary power,” he said.

CBDCs do not need a blockchain

Finally, Neha NarulaDirector of the Digital Currency Initiative at Media Lab of the Massachusetts Institute of Technologydiscussed the technical nature of CBDCs, while reminding other panelists that “CBDCs do not need a blockchain to work.”

“Blockchain technology is an umbrella concept” with many different components, she said, adding that central banks are free to “choose the components that make sense” for what they are trying to achieve.

With regard to the technical possibilities for a CBDC, Ms. Narula that it is important for the system to work both online and offline, and notes that it is “very important” for CBDCs to have offline capacity.

She also said CBDCs should be considered “digital cash.” As such, users should not have to open an account with a private company or accept terms related to their use.

Finally, Ms. Narula on that a CBDC should use “proven technology” and not necessarily “the latest in the crypto world.”

However, she still admitted that there is a lot to learn from the cryptocurrency world, noting that

“We would not talk about CBDCs at all if cryptocurrencies like Bitcoin did not exist.”

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