The Vision for a Digital Euro
Money can be categorized into two types: Central Bank money and Private money. Central Bank money refers to the physical cash issued by the European Central Bank (ECB) in the form of banknotes and coins. It is currently the only type of public money available to the public and can be considered as “public money.” Private money, on the other hand, is created by commercial banks, such as loans, deposits, and savings balances. Debit and credit cards, along with other online payment services, facilitate the transfer of private money.
Public and private money are interconnected, with public money serving as a stabilizing force for private money and enhancing trust in commercial banks. Private money can be converted into public money and vice versa, as there is confidence that the value of money remains stable.
Bridging Public and Private Money with the Digital Euro
A Central Bank Digital Currency (CBDC) enables the central bank to issue public money in an electronic format that is accessible to everyone. This would complement physical cash as public money, but with the key distinction that it is backed by the central bank. The Central Bank is unlikely to face bankruptcy since it is the legal issuer of cash, which banks rely on to convert their digital reserves. While commercial banks can run out of cash, the digital Euro ensures users can carry out transactions with their preferred digital payment method while avoiding a potential financial crisis.
The CBDC would drive financial innovation by improving the payment system with greater accessibility, security, efficiency, privacy, and regulatory compliance, all crucial for economic growth. This would reinforce the role of public money as the anchor for financial trust within the economy.
The Significance of a Digital Euro
The ECB’s CBDC is based on blockchain technology, allowing for peer-to-peer transactions through smart contracts. The use of distributed ledger technology enables users to store their CBDC in a digital wallet, facilitating the automation and programmability of money. Additionally, blockchain technology helps reduce transaction costs, which in turn lowers the barrier for users to enter the crypto space, fostering greater trust in blockchain systems.
Furthermore, the rapid advancements in financial technology have made it essential for public money to remain resilient against the challenges posed by unregulated alternatives like cryptocurrencies. CBDCs offer more robust public money through a distributed ledger system, compared to the current infrastructure.
Concerns also exist over the potential outflow of funds from traditional public money into alternative digital currencies, which could undermine the reserves available to commercial banks and pose a risk to financial stability.
The Effect of a Digital Euro on the EU’s Financial Systems
The introduction of a digital Euro could affect financial intermediation by providing the public with an alternative to traditional bank payments. It may also result in increased deposits from commercial banks to central banks at attractive rates. However, there are concerns that this shift could limit the availability of credit in the real economy, as commercial banks would have fewer funds for lending and lower profits. This could force banks to raise credit costs.
During a financial crisis, the digital Euro offers a stable digital asset with no upper limit, potentially encouraging depositors to withdraw funds from commercial banks and convert them into the CBDC if there is no regulatory framework to manage a digital bank run.
Moreover, the digital Euro could attract users from outside the EU, offering cross-border payment solutions. This would enable faster and more convenient remittances. However, measures would need to be implemented to prevent the digital Euro from becoming a speculative investment asset, as this could destabilize the international monetary system.
The ECB President is optimistic about the CBDC’s future, as commercial banks increasingly adopt distributed ledger technology. The EU Commission is expected to propose the digital currency once its investigation reaches completion.
