Digital Euro and Beyond: Europe’s CBDC Experiments
It was only a matter of time before cryptocurrencies attracted the attention of central banks—not only as a subject of regulation but also as a model for creating digital versions of national currencies. Currently, only three central banks worldwide have fully launched and operate central bank digital currencies (CBDCs). None of them are in Europe. For now, European central banks are mostly testing CBDCs in pilot projects or exploring their potential applications.
Central banks test CBDCs as digital cash alternatives
At the central bank level, the cryptocurrency sector is discussing CBDCs as a digital form of currency that complements traditional cash, i.e., banknotes and coins. Unlike non-cash deposits held with commercial banks, CBDCs can be issued solely by central banks.
CBDCs effectively supplement physical cash circulation with a digital form. While commercial banks issue standard non-cash deposits, CBDCs are state-backed. Two types of CBDCs exist, depending on their purpose: retail CBDCs, designed for everyday consumer transactions, and wholesale CBDCs, intended for use among financial institutions.
Currently, the only central banks that fully operate CBDCs are in the Bahamas, Jamaica, and Nigeria. However, this does not mean other countries are uninterested. Nearly 50 countries are running pilot projects, 36 are exploring CBDC use, and 20 are actively developing CBDCs and preparing for launch. [1]
Europe leads in CBDC pilot projects
Europe is at the forefront of this global trend. Eleven European countries have central banks operating CBDCs in pilot projects, including Spain, Andorra, France, Switzerland, Italy, Luxembourg, Montenegro, Hungary, Ukraine, Sweden, and Norway. The European Central Bank, a strong proponent of the digital euro, is also working on a pilot project. [2]
Six more countries are preparing CBDC initiatives (the United Kingdom, the Netherlands, Austria, Germany, Belarus, and Estonia), while two—Czechia and Serbia—are still in the research phase.
Cryptocurrencies in central bank reserves?
At the same time, some central banks are considering including cryptocurrencies in their foreign exchange reserves. However, this would involve actual cryptocurrencies such as bitcoin, ether, or XRP, not CBDCs.
In early 2024, Czech National Bank (CNB) Governor Aleš Michl suggested to the Financial Times that CNB could hypothetically pioneer the inclusion of cryptocurrency assets in its reserves. [3] He indicated that he would propose a test investment portfolio for bitcoin. If CNB’s Board were to approve such a plan, the bank would become the first in the Western world to include bitcoin in its reserves. [4]
Such a move, however, remains highly unlikely. Last September, the World Bank issued an opinion stating that cryptocurrencies are unsuitable for central bank reserves, mainly due to their extreme volatility. [5]
Sources:
[1] https://www.atlanticcouncil.org/cbdctracker/
[2] https://www.ecb.europa.eu/euro/digital_euro/html/index.en.html
[3] https://www.ft.com/content/a3c06f8f-34ad-4065-bcf4-97670230824f
[5] https://blogs.worldbank.org/en/allaboutfinance/crypto-assets--unfit-for-central-bank-reserves-today