The Deutsche Bundesbank has joined forces with the Massachusetts Institute of Technology (MIT) Digital Currency Initiative (DCI) to explore the concept of central bank digital currency (CBDC). President of the German central bank, Joachim Nagel, addressed MIT students during the project’s launch, highlighting the challenges that lie ahead for the digital euro.
Nagel emphasized that the joint research will focus on developing security and privacy measures for a CBDC. He raised concerns about the current private digital payment solutions, which often involve third-party services accessing consumers’ payment data for commercial purposes. In contrast, Nagel stated that the current payment system is not efficient, using the example of German bank cards that frequently do not work in other euro area countries despite being operated by an international company.
With the increasing digitalization, the Eurosystem is considering introducing a digital euro alongside physical cash, according to Nagel. While the United States Federal Reserve’s FedNow service, launched in July, offers an alternative, it has faced severe criticism. However, CBDCs have been the subject of even greater scrutiny, with concerns about privacy and potential impacts on the banking industry being prominent among opponents. European Central Bank (ECB) officials have been actively defending CBDCs and criticizing the banking community for not giving them proper consideration. ECB President Christine Lagarde, in particular, has dismissed conspiracy theories surrounding the digital euro.
Nagel acknowledged the potential risk of the digital euro as a “riskless asset” contributing to economic instability during times of stress by undermining banks. To mitigate this, limits will be imposed on the digital euro. He also noted that the public’s understanding of the digital euro project is currently limited, as it is still in the preparatory stage.
The DCI has collaborated with various institutions in exploring CBDCs, including the U.S. Federal Reserve Bank of Boston in its Project Hamilton for a potential digital dollar, as well as the central banks of Canada and the United Kingdom.
In conclusion, the introduction of a digital euro and other CBDCs could bring about significant changes in the financial landscape, both positive and negative.