The central bank of the Netherlands has seen the future, and it doesn’t include a predominance of fiat. Instead, De Nederlandsche Bank (DNB) sees digital currency as the legitimate next step in the evolution of monetary systems, and believes that central bank digital currencies (CBDC) are almost definitely going to become a major component of finance. Per the country’s central bank, “Cash is no longer king.”
DNB issued a bulletin, asserting that the use of physical cash in the country is on the decline, giving way to alternative options. Consumers are relying less on central bank-issued currency for their transactions, which must force the central banks around the world to reconsider their structures and determine if a “new type of money” needs to be introduced that is “better attuned to the needs of citizens and firms.”
The Netherlands is certainly not the first country to consider a CBDC—China, Japan, the Marshall Islands and many more are already working on possible alternatives. However, if the European Union were to decide to issue a CBDC, something that it has already expressed an interest in, DNB would be more than happy to lead the way. It explains, “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 feels that trust in existing monetary systems may be waning, hit especially hard during difficult times, such as the current situation with the coronavirus. Many retailers are shying away from physical cash, preferring to accept only cards and other forms of contactless payments for purchases. Digital currency would help to restore confidence, while giving consumers and businesses an easier and more cost-effective method for conducting financial transactions. A CBDC also has the added benefit of offering “diversity in the payments market,” which is currently not found.
There are risks associated with CBDCs, asserts DNB, but there are risks with any form of currency. The central bank explains, “In times of financial crisis, [a CBDC] could accelerate a bank run as citizens and firms try to avoid risks by converting balances they hold with commercial banks into CBDC. Accordingly, it is crucial that measures are taken to control the quantity of CBDC in circulation.” Bank runs are always a concern with existing financial solutions, as banks don’t actually hold the total amount of funds received from depositors.
The wheels have already been put in motion for the creation of digital currency as an accepted payment solution that can run concurrent to fiat, or even take the place of it eventually. It’s now just a matter of when, not if, the shift will occur.
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