The Deutsche Bundesbank has recently joined forces with the Massachusetts Institute of Technology (MIT) Digital Currency Initiative (DCI) to conduct research on central bank digital currency (CBDC). During the project’s launch, Joachim Nagel, the President of the German central bank, discussed the challenges that lie ahead for the digital euro.
Nagel addressed MIT students, stating that the collaborative research will primarily focus on developing security and privacy measures for a CBDC. He emphasized that private digital payment solutions often rely on third-party services that gain access to consumers’ payment data, which can be used for commercial purposes. In contrast, Nagel highlighted the inefficiency of the current payments system. He cited the example of German bank cards, which often fail to function in other euro area countries, even if they contain an international payment scheme.
As digitalization continues to grow, the Eurosystem is contemplating the introduction of a digital product that complements physical cash. Nagel specifically referred to the digital euro, while acknowledging other alternatives such as the United States Federal Reserve’s FedNow service, which was launched in July. Although FedNow has faced severe criticism, CBDCs have received even more negative attention. Critics often raise concerns about privacy and the potential impact on the banking industry. To counter these criticisms, officials from the European Central Bank (ECB) have been actively defending CBDCs. ECB President Christine Lagarde addressed conspiracy theories surrounding the digital euro in September, and other officials have criticized the banking community for dismissing CBDCs without proper consideration.
During his discussion with MIT students, Nagel admitted that the digital euro, as a “riskless asset,” could potentially contribute to economic instability during periods of stress by undermining banks. To mitigate this risk, limits will be imposed on the digital euro. Nagel also highlighted the fact that the general public has a limited understanding of the digital euro project, which is currently in its preparatory phase.
In addition to collaborating with the U.S. Federal Reserve Bank of Boston on Project Hamilton, a potential digital dollar initiative, the DCI has also partnered with the central banks of Canada and the United Kingdom.
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