In a report on new types of digital currency, Danmarks Nationalbank analyzes popular motivations for a central bank digital currency (CBDC) among developed countries. As background, Denmark is one of the EU countries that is not part of the Euro currency area. A basic rationale promoted by the European Central Bank (ECB) is for a retail CBDC to act as a trusted “anchor” for digital money once cash disappears. Denmark’s central bank points out that its domestic payments are already predominantly digital – just over 10% of physical purchases in Denmark use cash – and that it is doing just fine without CBDC.
The few citizens who store money in cash cite motivation as anonymity rather than trust. There is no evidence that citizens use and hold cash because they consider it safer than bank deposits, the report says.
Denmark has a few factors which it believes influence this position. One is that instant payments help ensure trust in digital money so people can quickly transfer money between different banks. Another is the central bank guarantee for bank deposits up to a limit, which now exists in many developed countries.
However, he acknowledges that most Danish payments still use bank money rather than other forms of digital currency. Only 22% of payments use mobile and are split between two national applications and Google and Apple Pay. In contrast, there is greater concentration in other countries, such as WeChat Pay and AliPay, which dominate in China.
The central bank says that if a variety of stablecoins of different quality became commonplace, fragmenting payments, then a CBDC could be perceived as safer, including compared to bank deposits. This is one of the reasons he is following developments.
Other motivations for CBDCs, perspective from Denmark
The National Bank takes several arguments in favor of a retail CBDC and suggests an alternative path through regulation. However, this does not dismiss the CBDC entirely as it is unclear how the innovations will unfold. Here are some of Denmark’s alternative suggestions or counter-arguments
- Support new technologies and innovation – instead, help develop standards, allow tokenized bank money
- Financial inclusion – every Danish citizen is already entitled to a bank account
- Strengthen future competition – a complex question. Hard to be sure the CBDC will reduce market failures
- Reduce dependence on foreign payment systems – greater independence could make the CBDC less useful
- Restrict the use of private data – The CBDC via intermediaries always discloses data; just legislate against it
- Improve resilience – but the tight interconnection between the CBDC and bank deposits means outages still have an impact
- Prevent currency substitution – limited by law. But this one IS relevant for Denmark
CBDC and currency substitution
At first, Denmark states that currency substitution is really only a risk for weak national currencies and considers itself a financially stable economy. This suggests that there may be restrictions on holding foreign currency, despite Denmark being an open economy.
However, one would observe that in many ways, Denmark is in a similar position to Canada, which is also a stable economy, but its neighbor, the United States, has a dominant currency that could threaten its monetary sovereignty.
Since Denmark is part of the EU but not part of the euro currency area, its position could be considered weaker or stronger than that of Canada: weaker due to open access rules within from the EU; Louder because he has a seat at the table.
The Danish report explicitly states that a CBDC euro solution on equal footing with other solutions could have an impact on competition in Denmark. And the unlimited possibility for consumers and businesses to hold euros could have an impact on monetary stability. “This could affect the demand for Danish kroner, the banks’ business model, and increase the risk of systematic bank runs,” the paper said.
Meanwhile, the report also explores wholesale stablecoins and CBDCs.