In a new article making the case for the digital euro, a European Central Bank executive notes that cryptocurrencies without backing are not efficient payment instruments and stable coins are vulnerable to execution. The executive marks the main goal of the project, which should provide Europeans with “easy access to central bank money” in the digital age.
Flows to digital money create risks, warns ECB official
Maintaining access to central bank money is essential for financial stability as payments become increasingly digital. According to European Central Bank (ECBPresident Christine Lagarde and Executive Board Member Fabio Panetta, the digital euro can do just that.
High-ranking representatives of eurozone monetary authorities are throwing their support behind a European central bank digital currency (CBDC) in a post on the bank’s blog this week, in which they say the decades-long “successful model of payments” is now being challenged.
The stability of the current model depends on private funding backed by public funds acting as an anchor. But payments are now undergoing potentially disruptive changes. People are increasingly paying digitally rather than with cash.” It’s a trend for convenience and opportunity, but it also poses some risks, the co-authors elaborate.
With the reduced use of cash, public funds could ultimately lose their role as Europe’s monetary prop and the euro – its trust and international importance. Lagarde and Panetta state that a digital payments ecosystem without a strong monetary anchor will create confusion about what qualifies as money, and provide an example with cryptocurrencies.
Cryptocurrencies cannot guarantee one-to-one convertibility with central bank money. They are not efficient means of payment, especially if their value is not backed by assets. In addition, stable coins are vulnerable to crashes.
Second, there is the threat of a small number of providers dominating the solutions of private companies. Large high-tech companies can use their large customer base to expand rapidly, increasing the risk of market abuse behavior. In addition, most of them are based outside the EU, which could lead to domination of the European payments market by non-European players, the central bank warns and emphasizes:
All this means that the role of central bank funds in the digital age needs to be maintained in order to maintain a stable and reliable payment system in Europe.
The ECB President and Executive Directors emphasize that this is why they launched the Digital Euro project a year ago. By introducing a digital version of the euro, EU citizens will be able to trust the monetary pillar behind digital payments. It is also expected to protect the autonomy of European payments and improve the efficiency of the payment system in general.
A widely accepted digital euro can make a difference, Panetta and Lagarde
Christine Lagarde and Fabio Panetta are convinced that the digital euro will succeed only when it becomes part of the daily lives of Europeans; the CBDC research phase will take at least another year, so the specific features of its design have not yet been determined, but some important principles are already clear, they say.
Widespread acceptance, ease of use, low cost, high speed, security, and consumer protection are attributes that users will appreciate. In addition to low cost and ease of use, merchants will seek to integrate the digital euro into the existing system. The new incarnation of a common European currency should support financial inclusion for those with limited access to digital payments.
Privacy must be of the highest standard, the ECB chief insists. They believe people should be able to choose the amount of information they want to disclose, but there is a condition – “as long as it complies with existing laws.”
Lagarde and Panetta point out that there are also pitfalls to watch out for: the EU monetary authorities need to make sure that the digital euro is used as a payment instrument, not as an investment. Otherwise, there is a risk that too many commercial bank deposits will move to the central bank, causing tension in the banking system.
Safeguards should be provided from the start, bankers say. A carefully designed digital euro will facilitate the transition of European society and economy into the digital age, ECB officials conclude, as official monetary authorities focus on maintaining the health of the currency and payment system.
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