ECB believes CBDCs could fight market dominance from big technology giants

Recently, the European Central Bank (ECB) published a discussion paper outlining the advantages, disadvantages, and economies deploying central bank digital currency (CBDC). According to ECB, the government-powered digital currencies could help reduce the dominance of Big Financial technology firms due to “network externalities” in the use of an exchange medium. It reads:

“CBDC may be the only solution to guarantee a smooth continuation of the current monetary system.”

The discussion paper starts off by highlighting the increased interest in CBDCs, which are currently being researched by central banks all over the world. So yet, they have only been introduced in Nigeria (eNaira) and the Bahamas (Sand Dollar), as TheCoinRise reported.

The research by the ECB places their development and prospects for adoption in the broader context of a society and economy that are quickly becoming digital. As a result, business models based on digital platforms have taken hold, and the value of data and software has increased. It also helped create an anti-competitive environment that is consolidating digital market power with a small number of tech giants.

“Network externalities” — the idea that users are drawn to these platforms specifically because others are using them — are what are responsible for this drive toward centralization. The report explains:

“In the extreme, this can give rise to a winner‐takes‐it‐all outcome with a single dominant platform in a particular market segment.”

ECB aims for monetary sovereignty

The ECB is worried about the potential for dominant platforms creating digital currencies, like Diem, to utilize network externalities to become dominant issuers of private money, thus undermining the monetary sovereignty of a domestic economy.

The paper suggests using CBDCs as a tool to ensure that public funds are still used effectively in the economy as a remedy. It might lower payment costs, ease financial intermediation problems, and strengthen the central bank’s capacity to act as a lender of last resort.

Europe has always shown a positive stance towards the CBDC. Early in August, ECB chose CBDC as a better choice over Bitcoin for cross-border payments. Notably, the European Commission is planning to bring the CBDC proposal in early next year, as TheCoinRise reported.