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A professor in a clinch with Denmark’s central bank: We need an e-krone if we want to be the ones calling the shots

Illustration: Nationalbanken

All over the world, so-called central bank digital currencies are being developed. Switzerland, Norway, Sweden, the USA, China, and the EU have all begun to investigate how a digital version of money can be rolled out, but Denmark did not even get started on it.

Denmark’s central bank (Danmarks Nationalbank) has repeatedly rejected the idea of a so-called central bank digital currency (CBDC), which comes as a surprise to Jan Damsgaard, professor of digitalization at CBS and author of the book Blockchain Business, which deals with, among other things, topics such as digital currencies.

“Digital money is on the rise everywhere around the world. Both cryptocurrencies and other central bank digital currencies, and then there is also the digital money issued by private companies, such as Facebook’s Diem,” he says.

Together with six of his colleagues, Jan Damsgaard has recently written a column in Berlingske that had the same point: Danmarks Nationalbank must start work on establishing a Danish central bank digital currency.

The difference between CBDC and cryptocurrency

When most people think of digital money, they think of cryptocurrencies, such as Bitcoin and Ethereum.

Cryptocurrency is based on blockchain technology, and can be traded anonymously, hence the name. And precisely because it is based on blockchain, it is decentralized, which means that it is not regulated by an authority. There are also the so-called stablecoins, which are pegged to the exchange rate of a conventional currency and are controlled by a private company or organization.

Jan Damsgaard and his colleagues do not want an unregulated cryptocurrency to be implemented in Denmark, as has been done in El Salvador, for example. The e-krone should be more reminiscent of cash.

A central bank digital currency is not necessarily based on blockchain but can be controlled from a central database in the given central bank. It enables the individual coin to be programmed so that it has a unique number, just like the serial number on a banknote.

According to Jan Damsgaard that can, for example, help prevent money laundering.

Safeguard against other digital currencies

A digital krone should not only be an alternative to banks’ electronic money, but also to other digital currencies.

Jan Damsgaard is worried that Danmarks Nationalbank is restricting its own role and leaving control to foreign companies.

He believes that if we want to be in control of how digital money is programmed (whether it includes serial numbers that can be used for tracking money laundering or earmarking services), Danmarks Nationalbank should at least investigate how digital currencies should be regulated in Denmark.

As an example of a function of CBDC that could be relevant to legislate, Jan Damsgaard mentions programming of the individual currency unit. He mentions that one could, for example, earmark public services for specific purposes. An example is that numbering of e-krone could be used to give a cash benefit recipient a subsidy for winter clothes for his children—and subsequently use the system to check that this is also what the money is actually used for.

“I think it sounds a little crazy, and not like something we should implement, but then we need to have an alternative ready that doesn’t have this capability. If there is an e-euro with those functions, and Danes start using it, then we will get it through the back door. The question is why Danmarks Nationalbank doesn’t want to take that place in the future. That way they could define their own role.”

The possible consequences have not been investigated

According to Danmarks Nationalbank, the consequences of introducing digital cash are unknown because no countries, with the exception of China, have actually introduced it:

“CBDC can have far-reaching consequences, including legal, financial, economic, competitive and consumer-related ones. The models for CBDC that are being investigated at the moment will not create immediate added value in relation to the solutions we have in Denmark today,” Danmarks Nationalbank writes in an email to Version2.

Danmarks Nationalbank’s rejection of the idea of a Danish e-krone surprises professor Jan Damsgaard.

“It comes as a surprise when Denmark is so far ahead in digitalization. It seems as if Danmarks Nationalbank is trapped in a position it can’t really get out of,” he says and continues:

“It seems like a stubborn decision due to not wanting to lose face by embarking on this (exploring the possibility of making an e-krone, ed.). Because there are no good reasons not to.”

And this leaves the professor with a desire for more thorough investigations to be taken by Danmarks Nationalbank:

“We are not saying that Denmark should have an e-krone. But we should have better substantiated arguments.”

So you don’t agree with Danmarks Nationalbank’s arguments against launching an e-krone project?

“No, not at all. We should learn more about it. So we can’t just be stubborn and in denial.”

Jan Damsgaard is surprised that the decision on whether to create an e-krone in Denmark depends solely on Danmarks Nationalbank. He believes that it is something that is important for all Danes, and that it should therefore be a democratic decision:

“It shouldn’t be Danmarks Nationalbank alone that decides whether we should have an e-krone. It’s something that affects us all. The payment infrastructure of the future should be the subject of a political discussion as well as a public debate. If we do nothing, we will lose the right to decide for ourselves how such a payment system should be designed.”

When cash disappears, so does the role of Danmarks Nationalbank

One of the researchers’ arguments for Danmarks Nationalbank to issue an e-krone is that cash is disappearing.

From 2017 to 2020, the use of cash fell by 7 percent. In 2020, cash accounted for 16 percent of payments in physical trade, according to a study by Danmarks Nationalbank. During the pandemic, this gained further momentum and cash payments fell by 25 per cent during its first months.

“There will only be bank-issued money left, which will be created through lending,” Jan Damsgaard says.

He highlights, among others, MobilePay, which has been sold to the Norwegian company Vipps, and Dankort, whose provider Nets has merged with the Italian company Nexi, as examples of a transfer of control abroad:

“These are two critical infrastructure components that are no longer under the control of Danish companies. This refutes the argument that we do not need an alternative. If we want to call the shots in Denmark, then we need to come up with a system for how we want to handle digital money.”

Danmarks Nationalbank wants to wait

Danmarks Nationalbank rejects Jan Damsgaard’s criticism of its position on the CBDC. In an email to Version2, the central bank writes:

“Digital money is today already almost dominant in Denmark. Danmarks Nationalbank supports the use of new technology that can lead to better, cheaper, and more efficient forms of payment. The most important thing for Danmarks Nationalbank is that new solutions are safe and effective for citizens and the society. It is possible that new technology and innovation can lead to new forms of digital money that can complement or perhaps even be better than existing ones.”

By digital money, Danmarks Nationalbank means bank deposits that do not exist physically.

Danmarks Nationalbank also does not believe that it going to lose its role in the future. It has simply chosen a different strategy:

“Danmarks Nationalbank’s role is to help ensure stable prices, secure payments, and stability in the financial system. In the area of payments, Danmarks Nationalbank’s Kronos2 system is at the centre of managing the Danish krone and monetary policy instruments. We will also play that role in the future. At present, it is too early to conclude whether there are benefits to central bank digital currency in Denmark.”