Digital currency or digital illusion? CBDC misses the mark on cash equivalence

The European Central Bank’s Digital Euro project aims to modernize payments by offering a central bank digital currency (CBDC) that can effectively serve as a functional equivalent to physical euro cash. But a new evaluation questions whether such digital currencies can truly replicate the essential characteristics that make physical money universal and trusted.

Published in the Journal of Risk and Financial Management, the study titled “Can CBDC Mimic Cash? A Deep Dive into the Digital Euro Case” by Patrick Schueffel of the HEG School of Management Fribourg systematically compares the Digital Euro to traditional euro banknotes across 36 key attributes. The findings reveal that despite digital advantages, the proposed CBDC falls short on several foundational criteria, particularly in terms of anonymity, offline usability, and universal acceptability.

How closely can Digital Euro replicate cash?

Can the Digital Euro serve as a true substitute for physical euro cash? To answer this, the study utilizes a qualitative framework comprising 36 pairwise comparison metrics. These benchmarks assess both formats across fundamental currency traits including portability, divisibility, privacy, acceptability, and more.

The analysis finds that while the Digital Euro performs well in areas like digital portability and programmability, key advantages of a modernized financial system, it falters in replicating crucial cash-like properties. Notably, it lacks offline usability, complete anonymity, universal recognizability, and unconditional acceptability.

These shortcomings are rooted in the inherent dependencies of digital platforms: connectivity requirements, regulatory surveillance, and the absence of physical tangibility limit the CBDC’s capacity to be as accessible or trust-inspiring as cash. As such, the Digital Euro is unlikely to offer the same frictionless, inclusive experience that traditional cash provides in both urban and remote contexts.

What are the implications for public trust and financial inclusion?

Beyond the technical attributes of the currency, the study highlights how the move toward CBDCs introduces new dynamics of power, control, and trust. Cash has historically served as a tool of inclusion, usable by anyone, anywhere, without oversight or authentication. In contrast, a centrally issued digital currency demands infrastructure, digital literacy, and user authentication, all of which can act as barriers to universal access.

This shift may disproportionately impact vulnerable populations such as the elderly, unbanked, and digitally excluded, those for whom physical currency remains essential. Furthermore, the loss of transactional privacy could undermine public trust in monetary systems, especially in regions where civil liberties are closely tied to financial autonomy.

Schueffel emphasizes that while the ECB envisions the Digital Euro as a universally accepted means of payment, the lack of anonymity and the presence of surveillance mechanisms compromise its equivalence to cash. The study suggests that claims positioning the Digital Euro as “digital cash” are premature and potentially misleading.

Should central banks rethink the CBDC design strategy?

As central banks across the globe accelerate CBDC development, the author argues for a cautious, evidence-based approach that acknowledges the irreplaceable qualities of physical currency.

Key design limitations, such as capped holdings, account registration, and potential transaction tracking, undermine the fungibility and unconditional usability that define traditional cash. These constraints may be necessary for policy objectives like anti-money laundering, but they erode the frictionless nature that makes cash so versatile and trusted.

Importantly, the study does not call for halting CBDC development altogether. Instead, it urges policymakers to recognize that the value of cash extends beyond its role as a payment mechanism. It embodies financial freedom, anonymity, and universal participation, values that are difficult to encode into digital systems.

In a nutshell, although the Digital Euro excels in digital integration, portability, and transaction precision, it still lacks key characteristics of physical cash. Rather than replacing cash, digital currencies may serve best as complementary tools that coexist with physical money in a hybrid monetary ecosystem, the study concludes.