Three threats to digital currencies 

Nation­al cur­ren­cies are not spared from the wrath of the digit­al trans­form­a­tion. After Lithuania and then China, which recently intro­duced the e‑yuan, a digit­al ver­sion of its cur­rency, Niger­ia has launched its own called the eNaira. Around the world, many cent­ral banks, includ­ing the European Cent­ral Bank (ECB), are look­ing at sim­il­ar pro­jects and test­ing what is now known as a CBDM, a Cent­ral Bank Digit­al Currency.

Such cur­ren­cies are seen as a digit­al ver­sion of the country’s cur­rency. Thus, the digit­al euro would be a claim on the ECB identic­al to the cash­less or fidu­ciary euro. In prac­tic­al terms, there would be no risk of default for the hold­er, unlike crypto-cur­ren­cies such as Bit­coin or Eth­ereum, which can exper­i­ence high volat­il­ity and are not backed by an exist­ing cur­rency. But there are many para­met­ers that com­plic­ate the issue of mov­ing to a CBDM at the same time as threats to the mon­et­ary sys­tem are grow­ing and wor­ry­ing cent­ral bankers.

The main threat is com­pet­i­tion from private play­ers, which is intensi­fy­ing with the emer­gence of crypto-cur­ren­cies launched by the digit­al giants, wheth­er Amer­ic­an or Chinese. After ambi­tions to launch its vir­tu­al cur­rency called Libra and then Diem, Face­book finally gave up, but oth­er large private com­pan­ies con­tin­ue to study the issue of crypto-cur­ren­cies. The risk is that, by tak­ing over the means of pay­ment, these com­pan­ies will acquire full vis­ib­il­ity of the pay­ments made and there­fore of per­son­al data.

In addi­tion to the threat to data con­fid­en­ti­al­ity, there is also a risk of dis­rupt­ing nation­al cur­ren­cies. Espe­cially at a time when cash is gradu­ally dis­ap­pear­ing, and pay­ments are increas­ingly vir­tu­al. Anoth­er import­ant issue is the glob­al com­pet­i­tion between cent­ral banks. The main cent­ral banks are com­pet­ing with each oth­er to impose their cur­ren­cies in inter­na­tion­al trade, par­tic­u­larly against the dollar.

Although still in its infancy, web3, a new gen­er­a­tion of the Inter­net which largely exploits block­chain tech­no­logy, con­sti­tutes an addi­tion­al threat. Indeed, new tech­no­lo­gies such as crypto-cur­ren­cies or block­chain already allow the cre­ation and pos­ses­sion of “nat­ive” means of pay­ment: digit­al assets, bit­coins, NFTs, etc. With web3 and the meta­verse, all this is becom­ing very real! In addi­tion, there are now stable­coins, which are stable crypto-cur­ren­cies. These accel­er­ate the vir­tu­al­isa­tion of money, as they reduce the risks asso­ci­ated with the volat­il­ity of crypto-cur­ren­cies. When it exists, the digit­al euro will move to web3 where it will be backed by the cent­ral bank and offers rel­at­ive stability.

In addi­tion to these mul­tiple threats and ques­tions, there is the ques­tion of wheth­er a digit­al cur­rency issued by a cent­ral bank could meet the demand and expect­a­tions of users. Indi­vidu­als cur­rently use vir­tu­al means of pay­ment (bank cards, trans­fers, pay­ments by tele­phone or inter­b­ank sys­tems, etc.) and many of them do not neces­sar­ily see what bene­fits a digit­al cur­rency could add.

How­ever, there are a num­ber of advant­ages to CBDCs. While not answer­ing the ques­tion of user adop­tion, the cre­ation of a digit­al euro would encour­age a rel­at­ive stand­ard­isa­tion of means of pay­ment at an inter­na­tion­al level. If the digit­al euro were to become a stand­ard, it would be inter­op­er­able, allow­ing for faster – almost instant­an­eous – and cheap­er pay­ments and exchanges. In oth­er words, inter­na­tion­al pay­ment sys­tems would be more effi­cient and reliable.

Opin­ions remain divided on the con­tri­bu­tion of digit­al tech­no­logy to the world of money. Some believe that what is hap­pen­ing now is a mar­gin­al phe­nomen­on and that it will remain that way; oth­ers believe that the devel­op­ments under­way are the back­bone of future fin­an­cial sys­tems; and more oth­ers hope that digit­al­isa­tion will lead to the improve­ment of cur­rent pay­ment sys­tems and to the mod­ern­isa­tion of inter-bank and retail pay­ments. The only cer­tainty at this stage is that, whatever option is chosen, the tech­no­logy will have to com­ply with the law.

Interview by Sophy Caulier