The Dutch Central Bank (DNB) thinks the eurosystem’s central bank digital currency (CBDC) should be more programmable than bitcoin.
Saying on Tuesday that cryptocurrencies offer some technological lessons for the banks they seek to displace, DNB wrote that smart contracts could help “future proof” CBDCs. The 45-page CBDC report is the Netherlands’ pitch to become a digital currency proving ground for the eurosystem.
“A smart contract system with complex logic potentially increases the demand for CBDC and offers opportunities to reduce transaction costs,” DNB said. “In this way it could contribute to diversity and innovation in the payment market.”
The striking admission comes as the DNB jockeys for influence in European central bankers’ growing digital currency debate. Just last month the French seized that discussion with an open call for limited CBDC experiments. The Netherlands, which does not have its own active experiment just yet, went a step further in the report: DNB wants to be a research, development and deployment hub for a European CBDC.
“If the decision should be taken within the eurosystem to experiment with some more concrete type of CBDC, we are ready to play a leading role. The Netherlands provides a suitable testing ground for such an experiment,” DNB said.
Rise of private cash
That appears to be an imperative for the Dutch, whose 17 million residents are the least likely in the eurozone to pay for goods or services with cash, according to a 2017 European Union report. Three years later Holland’s cash aversion has only come into stronger focus: there are fewer ATMs and fewer cash withdrawals each year. On a macro scale, “private digital money” use – private money being funds tied to a commercial bank account – is growing and Libra, though neutered, is still a threat.
Responding as well to what it said was its own citizens’ growing interest in CBDC, the DNB said digital currency could help ensure that public money stays alive in a digital future.
The report offers a detailed look at what a “reasonable” eurozone CBDC could be and compares the choices against some monetary benchmarks: Libra, bitcoin, cash, commercial bank money and central bank reserves.
“After 10 years of experimenting with private cryptos, the question is whether some techniques have sufficient added value for use in CBDC,” DNB mulled. It concluded that smart contracts may be the only “technique” worth salvaging, in part because its future-forward flexibility could make CBDC more in demand.
It indicated that CBDC should be more programmable to bitcoin and second only to libra.
DNB divorced smart contacts from another less desirable hallmark feature of cryptocurrency: distributed ledger technology (DLT). DNB roundly rejected DLT as a feature coined by idealists working outside the banking system.
“The fully decentralized solution of, for example, bitcoin, with decentralized validation, was partly ideologically driven,” DNB said as it argued against bitcoin’s resource-intensive and potentially cumbersome model of distributed consensus. “It seems unnecessary for CBDC to make those sacrifices.”
Even so, DNB embraced the need for some anonymity that bitcoin evangelists and cash stalwarts adore. DLT makes bitcoin transaction history completely transparent even while offering users a means to transact pseudonymously.
Conversely, commercial banks, who have full knowledge of their users’ transaction history, have a market incentive to sell data that central banks do not. DNB therefore said that a CBDC should offer a selective degree of privacy second only to wholly anonymous cash.
Those technical aspects and more build out DNB’s uncannily detailed envisioning of CBDC. Coming also with DNB’s emphatic call for CBDC to shore up the public money system as the world continues to change, it amounts to a striking endorsement of CBDC – perhaps, as the Dutch Finance Minister Wopke Hoekstra told parliament Tuesday, the loudest in Europe so far.
“In no other euro area has the central bank so clearly expressed a positive attitude towards digital central bank money aimed at the general public,” Hoekstra said.
“The ball is now” in the eurosystem’s court, he said.