The European Central Bank has been examining launching a CBDC, with indications that it would follow the direct-to-consumer or ‘retail’ model. The central bank has set up a task force to lead the analytical investigations into creating such a currency, though this may prove more complicated that it does elsewhere.

With the euro being the official currency of 19 European Union countries, a project to develop a CBDC would require a collaborative approach between the ECB and the various central banks in the member states. Different countries have put themselves forward to play a leading role.

The Bank of France published a document on March 30th announcing its intentions to launch a CBDC for use between banks, partly as a remedy to ailing legacy systems that currently encumber settlement between institutions. It has also experimented with Societe Generale with using a blockchain to settle a transaction using a CBDC.

The Dutch National Bank has put its hand up to play a leading role in the development of a digital euro, publishing a paper in which it describes CBDCs role in retaining public money.

This is more aligned to the ECB’s vision for a retail CBDC, while the Banque de France’s would be for wholesale use.

The DNB’s paper states that CBDCs must be universally accessible, which the wholesale model would fail to meet.

It would also not address the decline in the use of cash, a leading motivation of the DNB in seeing a digital euro developed.

Is there life in cash yet?

The DNB identifies three factors that will affect the urgency of the debate around a digital euro. The first two are the decline in cash usage and the competition from private currencies such as Libra and how they impact development in digital payments and financial inclusion.

The third is the present Covid-19 crisis. On the one hand, this will be assumed to be closely linked to the use of cash - more use of contactless payments, more online shopping, less brick-and-mortar retailers open etc - but the overall picture is more complicated.

While some countries, including the Netherlands, are seeing the ongoing trend of cash usage decline accelerate, other countries may in fact be seeing the opposite. Quite often, the importance of cash increases at times of crisis, as a flight to quality takes hold.

Bank of America’s head of financial institutions GTS, Paul Taylor, recently explained to Finextra TV the importance of cash as a security and bearer of value. He has therefore witnessed an increased demand for cash from banks across the world owing to the wishes of their clients.

Money’s role as a store of value keeps cash distribution high. There are several possible reasons for this, one of which is interest rates being so low, making the opportunity costs of holding cash very low.

Mixed attitudes towards digital euro?

This is not the case in the Netherlands however, where cash has been in full retreat for a number of years with the DNB expecting to see this accelerate amidst the Coronavirus pandemic.

The DNB’s paper states that the relative percentages of transactions carried out using cash and electronic means have effectively switched since 2010. While Dutch consumers paid 35% of their transactions electronically and 65% in cash a decade ago, the figures stood at 32% for cash and 68% electronic in 2019.

While most countries with a strong digital infrastructure have indeed witnessed a sharp downturn in cash usage in recent years, the Netherlands is ahead of the curve holding the lowest percentage of payments in cash in the eurozone in 2017.

This owes itself to the Netherlands’ relatively small size and population, 93% of whom have internet connectivity, a figure bettered only by tiny Luxembourg among eurozone countries.

The Netherlands, like its peers, gave away autonomy over its monetary policy on adopting the euro, meaning the development of a digital currency is rather more complicated than in China, Sweden, the UK or any other country engaged in doing so.

A digital euro would have to be introduced at the speed of the zone’s slowest members. While cash is only used for 32% of transactions in the Netherlands, the country is something of an outlier.

According to research by the DNB, Deutsche Bundesbank and ECB, cash was still very much in the ascendancy in 2017 in France (69% of transaction), Spain (87%), Germany (80%), Italy (86%), Belgium (63%), Portugal (81%) and Ireland (79%).

This suggests that the Netherlands may not have a great deal of competition in its quest to be the testing ground for a eurozone CBDC. It also means however that it will not amount to anything if its neighbours do not have the same incentive to proceed thereafter.