CBDC Could Be Used Against BigTech Market Dominance – ECB

CBDC could be used against BigTech market dominance, in order to protect the monetary sovereignty of a nation according to the European Central Bank.

CBDC Could Be Used Against BigTech Market Dominance

This week, the European Central Bank released a discussion paper on the benefits, drawbacks, and economics of introducing central bank digital money (CBDC). It stated that CBDCs might help prevent BigTech corporations from dominating the payments industry owing to “network externalities” associated with the usage of a medium of exchange.

Finally, the report suggests that CBDC may be the only way to ensure the smooth continuance of the existing monetary system.

Digital Platform Threats

The discussion paper starts by highlighting the increased interest in CBDCs, which are currently being investigated by central banks all over the world. So far, they have been released in two countries: the Bahamas (Sand Dollar) and Nigeria (eNaira).

The paper situates their rise and prospects for acceptance within the broader phenomena of a rapidly digitized world and economy. As a result, digital platforms have become dominant business models, with data and software playing a rising role. However, it has also contributed to an anti-competitive climate in which digital market power is being concentrated in the hands of a few industry titans.

This propensity toward centralization is fueled by “network externalities,” which means that users are drawn to these platforms because others are.

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

Concerning cryptocurrency, the ECB is concerned that dominant platforms creating digital currencies (for example, Diem) would use network externalities to become dominant issuers of private money. This might theoretically put into question a home economy’s monetary sovereignty – its dominance over the currency that serves as a store of value, medium of exchange, and unit of account.

What CBDCs Offer

As a solution, the paper suggests CBDCs as a vehicle for ensuring the continuing practical use of public funds in the economy. It might lower payment costs, smooth down financial intermediation frictions, and strengthen the central bank’s capacity to act as a lender of last resort.

A CBDC would assist maintain the central bank’s influence over monetary policy by maintaining monetary sovereignty. If the economy’s prices are denominated in a different currency, any expansionary policy will only cause a bout of inflation without increasing economic production.

“Theoretically, the monetary authority can ‘print’ unlimited amounts of the domestic currency to support financial institutions in distress,” explained the report. “However, such liquidity support is no longer available if liabilities are denominated in foreign currency, which increases the risk of bank runs (even for solvent institutions).”