The ECB is the latest central bank to discuss issuing a CBDC

The President of the European Central Bank, Christine Lagarde, recently stated that the ECB needs to stay “ahead of the curve” when it comes to digital currencies. In light of her statement as well as China’s imminent launch of a government-backed digital yuan, will the ECB become the next central bank to issue a central bank digital currency?

“We better be ahead of the curve”

At her first policy meeting as head of the European Central Bank, Christine Lagarde stated that the ECB “better be ahead of the curve” in the developments surrounding stablecoins as ”there is clearly a demand out there that we have to respond to.”

While she did not go into more detail on the matter, it is clear that Lagarde – who has long recognized cryptocurrencies as something to keep an eye on – is open to blockchain-powered payments systems.

The ECB is exploring privacy in CBDC

Only a few days after Lagarde spoke about her interest in stablecoins, the ECB published a report titled ‘Exploring anonymity in central bank digital currencies.’

In the report, the central bank says it has established a proof-of-concept (PoC) for anonymity in digital cash, which is part of the bank’s ongoing technical research into central bank digital currencies.

While the ECB makes it clear that the PoC does not imply implementation of a CBDC, in the report it states that the “ECB will continue to analyze CBDC with a view to exploring the benefits of new technologies for European citizens and in order to be ready to act should the need arise in the future.” Thus, leaving the door wide open for a CBDC.

The proof-of-concept developed by the European System of Central Banks (ESCB) shows that it is possible to build a CBDC payment system that provides users with a degree of transactional privacy for low-value transactions while still adhering to AML/CFT checks for higher-value transactions.

With the support of Accenture and R3, the ESCB’s DLT research network, EUROchain, has been able to create a payments system proof-of-concept that allows for AML/CFT compliance procedures while preventing the user’s identity and transaction history being seen by the central bank or its intermediaries, unless specified by the user. This is made possible through the use of so-called “anonymity vouchers,” which enable users to transfer small amounts of CBDC over a predetermined period of time anonymously.

Additionally, it is important to note that in this proof-of-concept the trialed CDBC is built with intermediaries in mind. The central bank would, therefore, not disintermediate banks by transacting with users directly. Instead, commercial banks remain in their current position as intermediaries.

China will be the first major economy to launch CBDC

While no specific launch date has been announced by the People’s Bank of China (PBoC), the launch of a blockchain-powered digital yuan is imminent if media reports are to be believed.

The digital yuan could be China’s preemptive strike against Libra and similar global digital currencies that could threaten its sovereign currency management. Moreover, a digital currency issued by the central bank would facilitate currency oversight and could help to boost the yuan’s global presence.

From a currency management point of view, a digital yuan makes sense. Capital inflows and outflows could be kept under control as cash could largely be taken out of circulation and money flows could be followed closely.

For the people of China, however, the digital yuan will likely mean another layer of surveillance and a decrease in their level of individual financial sovereignty. While Mu Changchun, head of the People’s Bank of China’s digital currency research institute, told the audience at a conference in Singapore, “we know the demand from the general public is to keep anonymity by using paper money and coins… we will give those people who demand it anonymity in their transactions,” it is hard to envision the country’s leaders to provide much – if any – transactional privacy to its digital currency’s users.

Regardless of the digital yuan’s effect on China’s economy, its population, or global commerce, the launch of the first CBDC by a major global economy will most likely cause other nations and currency unions to follow suit.

In light of the ECB’s research into the matter and the new ECB head’s openness to digital currency innovation, the European Central Bank may well become the next issuer of a CBDC.