China is already experimenting with the possibilities of introducing a digital currency since 2014. In the meanwhile, the debate in the United States is starting just now, and the European Union seems to be losing five years due to its bureaucracy. Nevertheless, the topic is very much ongoing and relevant. What are its possibilities and risks? In an article of Nederlands Dagblad, Professor of Monetary Economics at Erasmus School of Economics Casper de Vries covers these questions.
The use of Central Bank Digital Currencies
Governments are invested in creating their own digital currencies to centralize payment information. There are a multitude of applications for such a currency. This type of currency is known as the Central Bank Digital Currency (CBDC). De Vries has recommended its use in a report, being part of the Dutch Scientific Council for Government Policy. De Vries: ‘Commercial banks invested in making as little payments as possible with cash, which led to transfers being mostly digital. Because of this, banks were able to grant more loans. The reason that we proposed CBDC, is to counteract the ease with which these banks create money and therewith uphold debt’.
Effect on privacy
A CBDC is a central currency, meaning that a central bank has all the information regarding the money and all the transactions that are made with it. This means that there can be grave consequences for the privacy of people: every transaction will be known to the central bank and digital currencies can be easily programmed or manipulated. According to De Vries, this transition is a gradual one: ‘In a sense, we have already given up anonymity. Apparently, we aren’t as attached to our privacy. For instance, look at the confidentiality of mail (Dutch: briefgeheim). Currently, telephone data are saved and almost no one makes a fuss of it’.
Other uses of CBDC
According to some economists, CBDC can be very dangerous. Because CBDC is programmable, the currency can be used to exclude buying certain products, have the currency lose value or disappear if it isn’t spent within a certain period. If this would be done, consumers can become prone to very strong incentives to change their behaviour for better or worse. De Vries opposes this view: ‘Economists continually ask themselves what the most effective way is to have people exert the right behaviour. We are aware that this wouldn’t happen in Europe. If you could only use CBDC to buy tobacco and then restrict it, people will probably stop using CBDC and resort to other means to pay for tobacco, for instance barter’.
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You can download the full article from Nederlands Dagblad, 13 November 2021, above.