Netherlands central bank supports a digital Euro

The Central Bank of Netherlands, De Nederlandsche Bank (DNB), has released a statement outlining its position on a possible central bank digital currency (CBDC).

In the statement, the bank states that it is supportive of a central bank digital currency and it believes a digital currency would have significant benefits for Dutch citizens. In the report published on April 21, the bank confirms it is “ready to play a leading role” in research relating to central bank digital currencies.

The report considers several potential benefits of a central bank digital currency including cost and speed efficiencies in cross-border payments between citizens and states. It stated that a CBDC “could serve as a backup to payments made in private money, considering that we become exceedingly dependent on private money in a rapidly digitizing payment system.” It also noted that the COVID-19 pandemic is accelerating a global decline in the use of physical cash. As this trend continues, a CBDC could be used as a potential solution.

According to new data released by the Netherlands Bank (DNB), cash was used for 32% of purchases last year, down from 37% in 2018. For the first time, contactless debit card payments, at 43%, were recorded above cash’s share. Total debit card payments reached 67% of purchases.

However, the report also points to potential risks. One issue is that in a financial crisis, a CBDC might increase the ability for bank customers to withdraw funds as they avoid risk by converting balances they hold with commercial banks into CBDC. To mitigate this it says, “Accordingly, it is crucial that measures are taken to control the quantity of CBDC in circulation.”

The report noted that the discussions and issues raised by Facebook’s proposed Libra currency are “the reason why the DNB and other central banks are now considering issuing their own digital currency.”

The bank believes that the Netherlands is an ideal testing ground for the development of a CBDC, and it is ready to proceed with the research and development, including a “broad debate across the euro area.”

While the DNB could issue its own CBDC, a more likely path forward is a digital Euro, which would be issued by the European Central Bank (ECB) with member nations.

In January, Christine Lagarde, president of the European Central Bank (ECB), said “Innovation in the area of payments is racing ahead in response to the urgent demand for quicker and cheaper payments, especially cross-border ones. The Eurosystem in general and the ECB, in particular, want to play an active role in this field, rather than just acting as observers of a changing world.”

he Association of German Banks, Bankenverband, previously published a position paper titled “German banks say: The economy needs a programmable digital euro!” late last year.

The paper makes it clear that German banks want government-backed digital currencies to become the norm as opposed to decentralized alternatives such as Bitcoin, or a corporate-issued currency such as Libra.

“There can be no question that responsibility for the monetary system lies, and will continue to lie, with sovereign national states. Any currency provided either by banks or by other private companies must, therefore, fit into the state-determined system. Anything else would ultimately lead to chaos and instability,” the industry body stated.

A CBDC is a digital currency, however, it is not considered a true cryptocurrency like Bitcoin, as it is not decentralized. Instead, a CBDC would be issued by a central bank and regulated by its government. The digital currency would be pegged to the value of an equivalent fiat currency.

China is leading the move towards a possible CBDC and is the likely candidate to be the first to deploy. It has been researching different implementations of a digital yuan for some time and recently began testing in four Chinese cities.

Other banks to research a CBDC include the Bank of England, the Bank for International Settlements (BI), the Bank of Japan, the European Central Bank, the Sveriges Riksbank, the Swiss National Bank, the bank of South Korea, and the Bank of Canada.