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In December, the European Central Bank published a paper demonstrating why it’s a mistake to assume CBDCs and fiat money are subject to the same conditions, CoinFi reported. The authors of the paper pointed out that it’s a bad time for fees, yet raised the issue of whether the CBDC would be sustainable without a fee or cost recovery structure.
The paper observed:
With cash, merchants do not face any per-transaction fee. Nor do they require any acceptance device. This may not be the case for CBDC. The design of cost recovery and fee/compensation structures should be based on a comprehensive analysis, and consider alternative (and only partially compatible) principles.
3 basic factors for CBDC success
The ECB’s paper identified three basic factors that would ensure the success of the CBDC. These were incentivizing selected intermediaries, giving the CBDC some kind of status as a legal tender, and encouraging customer demand for CBDC payment options.
Europeans against digital euro
Many Europeans are against the idea of a digital euro, expressing fears about privacy violations. The central bank tried to assuage these with the following claim:
As public and independent institutions, central banks have no interest in monetising users’ payment data. They would only process such data to the extent necessary for performing their functions and in full compliance with public interest objectives and legislation.
The paper drew attention to the growing popularity of stablecoins and the dominance of non-European entities processing payments in Europe. On the subject of competition between banks, the ECB recommended launching a digital euro to improve it. According to the central bank, introducing the digital euro would give banks an incentive to offer higher deposit rates or better services. Economic outcomes would also improve as a result.
Nigeria and China implemented ECB recommendations
Both Nigeria and China are launching their own CBDCs. Apparently, they’ve already implemented some of the recommendations made by the ECB. One such measure was placing a limit on CBDC balances and transactions to protect banks from being undermined. The ECB noted the need for limits in the paper.