The race to issue a digital currency is on. Following the announcement of Libra (now renamed Diem) in 2019, the Covid-19 pandemic has given it fresh momentum and has reinforced the need for a ubiquitous public payment option. Nevertheless, digital currency is more than just another electronic payment method.
Currencies are the purest statement of trust that citizens make. They are not products, rather they are an expression of democratic values and faith in the issuing institution. It took centuries to establish the secure, resilient, universal and trusted basis for consumer payments that is cash. Since the outbreak of the pandemic, people have turned to cash, finding comfort in its security as a store of value and promise of freedom. More than one-third of people in the euro area keep a cash reserve at home, for example.
Cash’s reputation must be kept when it becomes digital. A central bank digital currency could unite the speed and convenience of digital payments with the benefits of cash. Fundamental characteristics, such as privacy and data protection, also apply to digital cash and are necessary for public acceptance. Even though the impact on all players in the financial system must be considered, the citizen is at the centre. We should keep the properties that make people trust cash rather than letting technical discussions dominate proceedings.
Citizens’ trust comes with ease of use and openness to new business models. When talking of ‘programmable’ currency, digital cash should not be overengineered and should be interoperable, without altering the currency itself. Defined technical layers should be open to outside innovation, novel business models (such as ‘streaming money’ where there is steady payment over the period a service is used) or entirely new ecosystems. The common denominator is the basic infrastructure – the definition and creation of a data format that represents value and is signed and issued by a central bank.
Even with academic research papers on CBDC piling up, questions remain: What about international acceptance of digital cash? How should we define its regulatory limits? These questions will need to be answered through experience, a process of learning and steady improvement.
One thing needs to be kept in mind: We don’t have centuries to make CBDCs a reality. We need to pick up the pace and set off on the right course. We don’t want to sleepwalk into an unwanted future. Using longstanding experience with cash and by adding the technological opportunities we have, there is a bright future for trusted digital cash.