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The ECB must prepare for the possible introduction of a digital euro, says ECB president Christine Lagarde. The institution has already published a report on the digital euro and board member Fabio Panetta explained in a blog post why such a digital currency can be important.
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A digital euro should take over the good sides of the euro: free access to a simple, widely accepted, risk-free and reliable means of payment. In a number of scenarios, a digital euro is even necessary. Panetta mentions in one blogpost situations where people no longer prefer cash payments, or extreme events such as natural disasters or pandemics, when other payment systems no longer work.
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Safe
Like banknotes, digital euros would give their holders a direct claim against the central bank, making them safer than any deposit with a regular bank.
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In addition, they can be transferred directly to other users, online or via bluetooth and prepaid cards, without passing through the banking system. In a report, the ECB says that deposits in digital euros are likely to be capped and at least partially subject to the ECB deposit rate, which is currently minus 0.5 percent. Ideally, such deposits would be offered by the private sector rather than just the ECB.
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The digital euro would also promote innovation for retail payments and coexist nicely with innovative digital markets. It would make the euro more attractive on international markets and thus strengthen the European financial system, Panetta said. In all this, the digital euro would not replace cash but would be complementary.
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A digital euro would provide protection against digital means of payment from outside the euro zone, controlled by foreign governments or private parties. If such means of payment were to gain the upper hand, it would be problematic for regulation and threaten financial stability and even the monetary and financial sovereignty of the euro area.
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A digital euro would provide protection against digital means of payment from outside the euro zone, controlled by foreign governments or private parties.
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Terrorism in privacy
The digital euro would also facilitate the fight against money laundering and terrorist financing. At the same time, Panetta admits that there are also challenges. He mentions the right to privacy. “We will have to solve those issues when developing functional and technological designs,” said the board member. Some also fear that a digital euro could complicate banking activity or create instability in the event of financial turmoil. “Good design must be able to provide an answer to those risks,” says Panetta.
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The blog post refers to a study released by the ECB on Friday, Report on a Digital Euro. This forms the basis for a public consultation starting on October 12. The ECB has already bundled information on its website. At the same time, six months of ‘experiments’ will involve experts from the ECB and the national banks of the eurozone. That without prejudging a final decision, according to the ECB. It will be decided by spring of next year whether there will be a research phase with a view to developing a ‘minimum viable product’, a kind of ‘first version’ of a digital euro.
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China on Facebook
The institution is thus following the Chinese central bank, which is fully experimenting with a digital currency. The Swedish Riksbank has been trying out the e-krona for several months now. The US Federal Reserve, the Bank of Japan and the Bank of England are showing restraint.
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Central bankers were startled last year by Facebook’s announcement that it would launch its own currency, the libra, the value of which would be tied to a basket of official coins. Facebook has since changed its plans. The currency would now be tied to individual national currencies and under the control of international regulators.
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