Views regarding the internationalisation of central bank digital currencies and their implications for the euro area
Published as part of The international role of the euro, June 2024.
Most of the central bank digital currency (CBDC) projects currently at an advanced stage of development have a domestic focus. However, a recent BIS survey suggests that about 30% of central banks in advanced economies and 20% of central banks in emerging markets are working on CBDCs that could be used across borders, in particular to reduce frictions in cross-border payments and maintain payment security. In this context, discussions on the design and development of retail CBDCs in selected major economies issuing international currencies are of particular relevance for CBDC projects globally and the future of the international monetary system. This box looks at retail CBDC internationalisation and discusses its relevance for the euro area and the digital euro project.
Starting with China, officials have so far avoided explicitly linking the development of a CBDC (e-CNY) to internationalisation of the renminbi. However, there are visible efforts by China to explore the international use of the e-CNY. The e-CNY is being designed primarily for domestic retail use, but its architecture is adaptable to wholesale and cross-border applications. Meanwhile, China is actively exploring international applications of the e-CNY through various initiatives and collaborations with foreign jurisdictions – even if its main collaborative project, mBridge, remains a wholesale cross-border multi-CBDC project. Steps have also been taken to broaden access to the e-CNY for foreign users through selected initiatives and pilot programmes, which could pave the way for using e-CNY for payments and settlement in economic and trade exchanges between China and South-East Asian countries. Finally, Chinese authorities have recently lifted some restrictions on foreign access, in particular with the aim of making the e-CNY more accessible to tourists.
Turning to the United Kingdom, in February 2023 the Bank of England and HM Treasury launched a public consultation on a digital pound – envisaged as a retail CBDC for use by households and businesses. Their consultation paper proposed that non-UK residents would be able to hold and use digital pounds on the same basis as UK residents. The UK authorities further stated that any non-resident access would be set up in accordance with the G7’s 2021 pledge to design any future CBDCs in a way that would avoid the risk of currency substitution in other countries. Most respondents to the consultation supported the proposal on access for non-UK residents, but several felt that the rollout of a digital pound should initially focus on UK residents.
Finally, the United States has not yet taken an official position on pursuing or implementing a US-issued CBDC. Domestically, US institutions are scrutinising the potential benefits and challenges tied to the introduction of a CBDC. In addition, China’s strides in the development of the e-CNY and its potential internationalisation have led to security concerns and the introduction of two bills in the US Congress to study and counter e-CNY developments. However, the proposal of a US-issued CBDC has been met with growing political pushback, largely related to user privacy and consumer protection as well as to the respective roles of the Federal Reserve System and private market participants in the payments system. Federal Reserve officials have questioned the need to develop a retail CBDC to spur innovation in the field of payments and dismissed the idea that digital assets may represent a threat to the international role of the dollar, in particular because trading in decentralised finance relies on stablecoins that are predominantly pegged to the US dollar. Recently, the Chairman of the Federal Reserve Board reiterated that it is “nowhere near recommending – or let alone adopting – a central bank digital currency in any form”.
From a European and euro area perspective, a digital euro would be a digital retail means of payment issued by the ECB available for all people and businesses and all retail payment scenarios in the entire euro area, wherever digital payments are accepted. It would combine some of the most valued characteristics of cash with the main advantages of digital payments and cover the most common payment scenarios, including payments in online and physical stores and between people both online and offline. In parallel, a digital euro could bring about strategic advantages; it is expected to strengthen Europe’s strategic autonomy and resilience, decreasing its dependence on private external providers, particularly in the context of a potential crisis or geopolitical tensions. The legislative proposal on a digital euro currently being discussed by European co-legislators acknowledges the strategic importance of countering the risk that third-country CBDCs and stablecoins may reduce the role of the euro and envisages the use of digital euro outside the euro area and in cross-currency payments to foster the international use of the euro. The draft legislation contains specific provisions on the distribution of digital euro outside the euro area, distinguishing between distribution (i) outside the euro area, but within the European Union; (ii) in third countries, i.e. outside the European Union; and (iii) in third countries or territories under a monetary agreement with the European Union. The proposal also includes provisions on cross-currency payments for the purpose of trade or remittances, in line with the G20 agenda. In its opinion on the legislative proposal, the ECB welcomed that the proposed regulation would make digital euro initially accessible to persons established or residing in the euro area, while access for visitors together with access for consumers and merchants in the European Economic Area and selected third countries could be part of subsequent releases. The ECB clarified that a digital euro would allow for cross-currency payments by establishing interoperability between digital euro and other CBDCs, subject to prior agreements between the ECB and third countries. Such interoperability could be achieved either via an interlinking model based on common standards or by enabling multi-currency features in the digital euro back-end. ,
To conclude, a number of CBDC projects both in advanced economies and in emerging markets cover the potential use of CBDCs outside the jurisdiction in which they are issued and for cross-border purposes. In addition, BRICS countries are exploring alternative payment options, including the potential development of a platform to link CBDC initiatives of these economies. In particular, recent efforts by China, if successful, could lead to a greater international acceptance of the e-CNY. Whether these developments will influence the international monetary system remains uncertain at this stage, as much will depend on actual take-up of the initiatives. In parallel, efforts by multilateral institutions like the IMF and the BIS could support the development of frameworks to facilitate the creation of CBDCs which would reduce frictions in cross-border payments, avoiding a fragmentation of the international monetary system. From a euro area perspective, the ECB will therefore take CBDC internationalisation into account in view of the digital euro’s objective of supporting the euro area’s open strategic autonomy. Moreover, sustaining proactive involvement with central banks in other jurisdictions is imperative to guarantee that the possible international use of CBDCs, especially for cross-border transactions, truly brings benefits. This requires careful calibration of design features to mitigate unintended consequences for the stability of the international monetary system.