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Three threats to digital currencies 

Julien Prat
Julien Prat
Researcher at CNRS, CREST and École Polytechnique (IP Paris)
Key takeaways
  • The digital euro would be a currency of the European Central Bank (ECB) in the same way as the Euro is. Unlike crypto-currencies, there would not less risk.
  • But the digitisation of currencies has major drawbacks such as the disruption of the dominant currency or threats to data privacy.
  • Included in these threats are private-public competition, which is much more complex than elsewhere, and the birth of the metaverse or the web3 making the use of cryptos concrete.
  • A last question remains around the trust of users towards these currencies. Would the trust between a digital and a monetary Euro be the same?

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.

#1 Public-private competition

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.

© MIT, CBDC Project

#2 Web3 and crypto-currencies

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.

The Future(s) of Mon­ey con­fer­ence, organ­ised in Paris by the “Blockchains & plat­forms” chair at Insti­tut Poly­tech­nique de Paris, is an oppor­tu­ni­ty for play­ers in the glob­al ecosys­tem (researchers, cen­tral banks, indus­tri­al experts, start-ups, cryp­to-cur­ren­cy cre­ators, etc.) to con­sid­er the future of mon­ey – or rather “cur­ren­cies” – at a time of dig­i­tal trans­for­ma­tion, the grad­ual dis­ap­pear­ance of cash, and the pro­lif­er­a­tion of dig­i­tal cur­ren­cies. Will the emer­gence of a new tech­nol­o­gy give rise to a new econ­o­my? The ques­tions are numer­ous, the opin­ions divid­ed, and the top­ic remains con­tro­ver­sial between play­ers in the world of bank­ing, aca­d­e­m­ic research, the pri­vate sec­tor or the blockchain. This is a good oppor­tu­ni­ty to exchange ideas in a con­struc­tive way and to see how we can take advan­tage of the technology.

#3 User acceptance

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

Contributors

Julien Prat

Julien Prat

Researcher at CNRS, CREST and École Polytechnique (IP Paris)

Julien Prat is Head of the academic chair “Blockchains and platforms”. His research covers information economics, contract theory and labour economics. His current projects focus on the optimal design and financial implications of decentralised systems.

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