Last week Fabio Panetta, a member of the Executive Board of the European Central Bank, said that it is not a foregone conclusion that Central Bank Digital Currencies (CBDCs), such as the hypothetical digital euro, will be legal tender.
The reason why the digital euro might not necessarily be legal tender
As Bloomberg reports, speaking at an ECB panel on digital currencies in Helsinki, Fabio Panetta said:
“It would be quite awkward not to have legal-tender status for an additional instrument issued by a central bank, though that achieving the status should not be taken for granted”.
In other words, Panetta warned that the mere fact of being central bank-issued coins might not be enough to make these new digital currencies legal tender.
While this may sound strange, perhaps even absurd, it clearly requires some formal steps to become a reality that cannot be taken for granted nowadays.
CBDCs: without legal tender they are meaningless
In reality, a CBDC without legal tender would probably not make any sense, because it would have to be a natively digital version of today’s existing fiat currencies that are legal tender, so as to be always exchangeable 1:1 with them.
Therefore, in the event that the final formal step needed to make them legal tender for all intents and purposes were to be missed, their potential use would be extremely limited, perhaps rendering futile the efforts made to create them and place them safely on the markets.
Panetta evidently wants to warn the national regulators of the Eurozone states that they may be required to intervene explicitly in this regard.
During the same panel, the governor of Russia’s central bank, Elvira Nabiullina, also stressed the importance of seamless conversion between the various forms of the same currency, describing it as “crucial” for society’s confidence in these new forms of money.
Therefore, while it is almost necessary that CBDCs be made legal tender, this is far from straightforward.
In particular, it would prevent consumers from choosing not to use them, and instead, continuing to use the current digital forms of fiat currencies, thus making central banks’ efforts to develop these new technologies pointless.
The case of China
For example, in China, where the PBoC’s CBDC field testing is already well advanced, plans for the issuance of a digital yuan involved making it legal tender from the very beginning.
Thus the objective is very clear: CBDCs are being created to be legal tender, and there is no doubt about that. The doubts concern the proper conduct of the formal and legal procedures that will grant it.