From the ECB’s website

Published on 27th June 2023

The European Central Bank is one of several institutions in the central banking world to be investigating the introduction of a ‘Central Bank Digital Currency’ or CBDC. They refer to it as the ‘digital euro’.

The above paragraphs are from their website section about the ‘digital euro’ project and attempt to define what ‘central bank money’ is. The definition has been derived backwards from the structure of the Eurozone institutions, rather than from the classic definition of ‘central bank money’. It masks that there is no genuine ‘central bank money’ in euro at all, if its genuineness is its freedom from credit risk.

It is not true that ‘public money’ and ‘central bank money’ are synonymous. A bond issued by a public sector entity like a transport utility in Milan can be described as ‘public money’ because the transport utility’s backer will be the city of Milan but this does not make it free of credit risk for the investor. What if the form of backing is simply share ownership? The more limited and distant the ‘backing’, the higher the credit risk and the further away the item is from constituting ‘central bank money’. Even if it could be proved that the ultimate backer was the Republic of Italy – a notionally ‘sovereign borrower’ – there is still a credit risk, as was shown by the ‘haircut’ imposed on owners of the bonds in euro of the Republic of Greece.

Physical cash in euro is ‘backed by the public sector’ but not in the direct way it should be to count as classic ‘central bank money’: banknotes in euro are issued by the ECB, whilst coins are issued by the other Eurosystem members, the national central banks. The ECB is owned by the EU’s national central banks but there is no automatic claim on EU taxpayers to meet the ECB’s liabilities. The national central banks are owned by their member states: there is no structure for the taxpayers of other member states to back each one.

Money circulating within the Eurosystem (the European System of Central Banks) is the liability of the Eurosystem member it is held with at the time: if it is on an account at the Banque de France, it is a risk on the Republic of France. It is not the liability of all the Eurozone counries.

It serves the interests of the ECB to issue a definition of ‘central bank money’ that masks the flaws in the European Monetary System, and to position the ‘digital euro’ as just a new form of it.

We recently made a study of new material on central bank investigations into CBDC from Sweden,[1] Japan,[2] the European Parliament,[3] the UK’s House of Lords[4] and the central banks’ own supranational organization (the Bank for International Settlements or BIS)[5].

The material does not answer the basic question – What is CDBC for? The nearest we come is an opaque statement from the BIS that its purpose is to ensure ‘ongoing retail access to central bank money’.

99.9% of the world’s population would not know what that means. Those of us in the 0.1% (is it even that many?) understand it as meaning money that it is free of CREDIT RISK because it is a liability of a sovereign country in its own currency, of which it is the sole user.

‘Central bank money’ is free of CREDIT RISK because the sovereign country has powers available to it that ensure it need never default – the sovereign country is able to instruct its central bank to print more money to pay its debts as they fall due.

‘Central bank money’ exists in three forms: (i) government debt (ii) cash (iii) a credit balance on an account at the central bank, with the proviso regarding (ii) and (iii) that there must be a reinsurance mechanism between the central bank – whose direct liabilities these categories are – and the government treasury of the country concerned so that indirect but still irrevocable and unconditional liabilities of the government, and therefore backed by the tax-raising power and capacity of the country (i.e. by how much tax the country can declare is due and its ability to collect it).

‘Central bank money’ is by definition ‘backed by the full faith and credit’ of all tax-liable entities – natural and non-natural legal persons – in the country of the currency and the central bank concerned.

CREDIT RISK is not the sole risk to which ‘central bank money’ is prey, though.

Government debt in the form of fixed-rate bonds entails MARKET RISK (which Silicon Valley Bank found out the hard way).

The purchasing power of ‘central bank money’ is not protected for a domestic holder of it, if inflation rises higher than the return on it – which has happened since the Global Financial Crisis: INFLATION RISK.

For a non-domestic holder there is no guarantee of the countervalue of the holder’s ‘central bank money’ in their own reference currency – FOREIGN EXCHANGE RISK.

For a non-domestic holder there is the added risk that the government of the issuing country may place an embargo on the transfer of funds overseas – TRANSFER RISK or POLITICAL RISK.

The euro fails a number of the tests of having any ‘central bank money’ at all, like no reinsurance mechanism between the ECB and member state government treasuries for cash and for balances on ECB accounts, that none of the member states are the sole user of the currency, and that none of the member state governments can instruct either their own national central bank or the ECB to issue currency so as to avoid a default. In these respects the euro is no better than a synthetic currency, like its forerunner the European Currency Unit or even the European Unit of Account.

The very usage of the term ‘euro central bank money’ has served to debase the concept of ‘central bank money’ and has been the first step towards admitting bonds to the ECB eligible collateral list that are barely of Investment Grade in the case of the bonds of several Eurozone member states, that are issued by public sector entities but with weak and/or distant linkage to the government treasury of the country concerned, and which, in the case of corporate and securitized bonds, fail every test of being ‘central bank money’. The Eurosystem exchanges all of these asset classes for ‘central bank money’ at near to par, by buying them or lending against them, and crediting the purchase/loan proceeds to an account held at a Eurosystem member.

As a result it is a nonsense to talk about a ‘Central Bank Digital Currency’ in euro, because there is no genuine ‘central bank money’ in euro to start with, to which a ‘digital euro’ would furnish ‘ongoing retail access’, to use the BIS’ phrase.

[1] ‘E-krona report: E-krona pilot, phase 3, April 2023’

[2] ‘Central Bank Digital Currency Experiments – Results and Findings from “Proof of Concept Phase 2”, May 2023’ ref. dig230529a

[3] IPOL_IDA(2023)741507 – ‘When in doubt abstain (but be prepared)’ and IPOL_IDA(2023)747848 – ‘Digital Euro – Reviewing the progress to date and some open questions (May 2023)’

[4] accessed on 1 June 2023

[5] ‘Central bank digital currencies: ongoing policy perspectives – May 2023’

[1] IPOL_IDA(2023)741507 – ‘When in doubt abstain (but be prepared)’

[2] IPOL_IDA(2023)747848 – ‘Digital Euro – Reviewing the progress to date and some open questions (May 2023)’