The road to negative interest-rates is paved with central bank digital coins

by Shaun Richards

It was only yesterday we took a look at a central bank raising interest-rates and operating in a conventional manner. Today we can note what is pretty much a binary opposite which is the European Central Bank or ECB. Regular readers will be aware that as well as its negative interest-rates ( -0.5% Deposit Rate and -1% for banks)it has been tilling the ground for even deeper negative interest-rates for some time now. The last few days have seen an acceleration in the PR campaign for this as to continue the imagery Farmer Panetta of the ECB Executive Board has given not one but two speeches on the subject. Here he is from this morning.

A digital euro would be a central bank liability made available in digital form for use in retail payments
• Aim: maintain public access and full usability of central bank money in a world where consumers and firms are turning increasingly towards electronic payments.

He has not made much of a case here has he? For example last night I went to the supermarket for a few things and paid electronically without any need for any central bank involvement. Indeed only last week he pointed out that the world is innovating at pace.

Payments are no exception: innovative forms of private digital money are emerging in response to changing needs, which are transforming how we pay and the payment landscape more broadly.

I remember the first time I saw someone pay via their smartphone and feeling a little antediluvian as I had put some cash in my bag to pay for my physio appointment. But we do not need Farmer Panetta for this as it is going well without him.Unless of course that is his fear.

It has been argued that such a central bank digital currency (CBDC), if issued, would be redundant given the vast supply of private digital monies available, including bank deposits, credit cards, electronic money and mobile applications, and possible future payment solutions based on stablecoins.

The War on Cash

Farmer Panetta seems to have forgotten the war on cash undertaken by the ECB. The scrapping of the 500 Euro note for example with the claims that it was used by terrorists, money launderers, drug dealers and the like.

Convertibility at par provides confidence in private money because it reassures us regarding its ultimate value and its usability for payments. For example, when we go to our bank’s cash machine and convert our deposits into an equivalent amount of cash, we are safe in the knowledge that our deposits have kept their value.

Nobody seems to have told him about the present inflationary burst which means that cash has not kept its value. Over the past year it has reduced the value of cash by 4.1% according to Eurostat and of course more if you are a first time buyer of property. Fortunately most retail savers have avoided negative interest-rates but some are losing an extra 0.5% via negative interest-rates on deposits. Although of course not on cash which is a moot point.

It did not take too long for a familiar line of attack to appear.

Today we have access to central bank money in the form of cash. The importance of cash in payments is declining, however, as people increasingly prefer to make digital payments and shop online.

Even the pandemic can be deployed as it has led to a boost for electronic payment.

If given the choice, almost half of euro area consumers would prefer to pay with cashless means of payments, such as cards. Internet sales in the euro area have doubled since 2015.

As so often with central bankers the real world diverges from their rhetoric. He has been cherry-picking the data because in fact the demand for cash has risen as he is forced to admit.

And while the cash stock has continued to increase and has even been boosted by the pandemic owing to higher precautionary demand for cash, only about 20% of the cash stock is now used for payment transactions, down from 35% fifteen years ago.

Yes cash is in such a bad way there is more demand for it! Just like with inflation he has to cherry-pick components as otherwise he has just torpedoed his own argument. Mind you the desperate link to postage stamps leaves him splashing around for relevance.

If these trends were to persist and accelerate, cash would end up losing its central role and becoming a means of payment that people would be reluctant to use because it would be less adapted to their needs. Just as the postage stamp lost much of its usefulness with the arrival of the internet and email, so too could cash lose relevance in an economy that is becoming increasingly digital.

So if the trend for higher cash demand were to persist cash would lose its central role Fabio? He gets more desperate here as again as reality is inconvenient he has to climb on his cherry-picker yet again.

Even central banks’ pledge to continue to supply cash would do little to guarantee that cash would remain an effective anchor if there was insufficient demand for it as a means of payment.

Here it comes!

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As people start to use cash more as a store of value rather than a means of payment, having a digital euro would enable them to continue using central bank money as a means of exchange in the digital era.

Actually the private sector has been doing rather well as Fabio was forced to admit earlier and that of course is the source of the problem. The technology companies have done so well that they have grabbed a technological and comparative advantage. To return to my earlier example the use of smartphones to pay has proven both safe and convenient meaning it has spread like wildfire as a means of payment bypassing the banks. That is one fear for Fabio and the other is that what if they ran a choice of currency with the US Dollar picking up ground? The Euro itself could be under threat as a high-tech version of the Dollar competes with the Zombie Euro banks.

In fact a central bank digital coin is so good people may not realise it.Presumably in the same way that they do not realise that inflation is good for them.

Users may lack sufficient incentives to fully appreciate the public benefit created by the availability of a CBDC and – given the vast supply of private digital monies – could express insufficient demand for it.

Indeed it would allow people to do what they er do already….

For consumers, the digital euro would offer a cost-free and convenient way to pay digitally anywhere in the euro area. I

Hands up who can recall the record of public bodies with what was private data before they got their hands on it?

It would also increase privacy in digital payments: as a public and independent institution, the ECB has no interest in monetising users’ payment data and it could only process them to the extent necessary for the functions of the digital euro, in full compliance with public interest objectives and EU legislation.

Back in the real world the state would immediately know all your transactions.

So a 100% monopoly is better than an oligopoly?

Moreover, a digital euro could contain the cost of payments through its potential to mitigate the market power of dominant digital payment providers, which already control around 70% of European card payments.

Even worse for Fabio is that the oligopoly has provided a wave of innovation as he was forced to admit earlier.


The central banks are afraid of the increasing digitalisation of money. It weakens their power and of course weakens their most precious institution the banks. The tech companies have proven to be far more light-footed than the banks. This provides a particular problem for the Euro area as its leaden-footed banks find that the US tech companies are like Mo Salah dribbling through them. This is a deeper issue as the last decade has essentially been one of protecting the banks who now are under fire from another source.

This is linked to the particular problems of the Euro which have led it to go as far as it thinks it can with its -0.5% and -1% interest-rates. But it fears (correctly in my view) that on its present road it will be singing along with Madonna.

Deeper and deeper and deeper and deeper
Sweeter and sweeter and sweeter and sweeter

But by providing access to a 0% interest-rate cash money stands in the way. So they need a digital Euro to take us to the -3% that Fabio Panetta has mentioned in the past. The only real delay I can see is that to save the banks they will have to destroy them! As a -3% interest-rate will see people dash to both cash and the US tech companies. They want and indeed need to go first but also fear the consequences as what if there is a run on the digital Euro?

Oh and as to the apparent support for cash money. Remember that to stab something in the back you first have to get fully behind it.



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