The ECB is considering how a CBDC could ensure that central banks retain monetary sovereignty worldwide, without being outcompeted by private cryptocurrencies.
The European Central Bank unveiled a discussion paper this week on the pros, cons, and economics of implementing central bank digital currency (CBDC). It suggested that CBDCs could help stave off dominance from BigTech firms in the payments market due to “network externalities” surrounding the use of a medium of exchange.
Ultimately, the paper posits that CBDC may be “the only solution to guarantee a smooth continuation of the current monetary system.”
The Threat of Digital Platforms
The discussion paper begins by noting the growing interest in CBDCs, which are now being explored by central banks worldwide. They’ve so far been launched in two countries: the Bahamas (Sand Dollar) and in Nigeria (eNaira).
The report contextualizes their growth, and potential for adoption, within the larger phenomenon of a rapidly digitizing world and economy. This has led to digital platforms becoming dominant business models, and a growing role for data and software. However, it also contributed to an anti-competitive environment that is centralizing digital market power with a handful of tech giants.
This tendency towards centralization is caused by “network externalities” – meaning that users are attracted to these platforms precisely because others are using them.
