Unbacked cryptocurrencies are not an efficient means of
payment and stablecoins are vulnerable to runs, top officials at the
European Central Bank have pointed out in a new article making the case
for a digital euro. The executives have marked key objectives for the
project which should provide Europeans with “easy access to central bank
money” in the digital era.
Trend Toward Digital Money Creates Risks, Senior ECB Officials Warn
Maintaining access to central bank money is crucial for financial
stability when payments are becoming increasingly digital. The digital euro can achieve that, according to the President of the European Central Bank (ECB) Christine Lagarde and Fabio Panetta, member of its executive board.
The high-ranking representatives of the eurozone’s monetary authority
have thrown their support behind Europe’s central bank digital currency
(CBDC)
in a piece published this week in the bank’s blog, in which they note
that the “successful model for payments” that lasted many decades is now
challenged.
The stability in the current model rests on private money being
backed by public money which serves as an anchor. “But payments are now
undergoing a potentially disruptive transformation. People are
increasingly paying digitally instead of with cash,” a trend towards
convenience and opportunities, which also brings some risks, the
co-authors elaborate.
With decreasing use of cash, public money could ultimately lose its
role as the monetary anchor in Europe, and the euro — trust and
international importance. A digital payments ecosystem without a strong
monetary anchor would create confusion about what qualifies as money,
Lagarde and Panetta say, and provide an example with cryptocurrencies:
They cannot guarantee one-to-one convertibility with
central bank money. They are not an efficient means of payment,
especially if their value is not backed by any asset. And, in the case
of stablecoins, they are vulnerable to runs.
Then there’s the threat of a few providers dominating private sector
solutions. Big tech companies can use their large customer bases to
expand quickly, increasing the risk of market-abusive behavior, and the
fact that most them are based outside the EU could lead to domination of
the European payments market by non-European players, the central
bankers caution and emphasize:
All this means that, if we are to preserve a stable and
reliable payment system in Europe, we need to preserve the role of
central bank money in the digital age.
The ECB president and board member stress that this is why the bank
launched the digital euro project a year ago. Introducing a digital
version of the euro would ensure that EU citizens can trust in the
monetary anchor behind their digital payments. The hope is that it will
also protect the autonomy of European payments and improve the
efficiency of the payment system in general.
Widely Accepted Digital Euro Can Make a Difference, Panetta and Lagarde Believe
Christine Lagarde and Fabio Panetta are convinced that the digital
euro can be successful only if it becomes part of the everyday lives of
Europeans. The specific characteristics of its design are yet to be
determined, as the CBDC’s investigation phase will take at least another
year, but some key principles are already clear, they say.
Wide acceptance, ease of use, low costs, high speed, security, and
consumer protection are the attributes that users would appreciate.
Merchants would seek low costs and ease of use as well as integration of
the digital euro with existing systems. The new incarnation of Europe’s
common currency should also support the financial inclusion of those
with limited access to digital payments.
Privacy must enjoy the highest standards, the ECB chiefs insist. They
think people should be able to choose how much information they want to
disclose but there’s a condition — “so long as they comply with
prevailing laws.”
There are also pitfalls to be aware of, Lagarde and Panetta point
out. Financial authorities in the Union need to ensure that the digital
euro is used as a means of payment, not as a form of investment.
Otherwise, they run the risk of too many commercial bank deposits moving
to the central bank which can cause tensions in the banking system.
Safeguards should be provided from the outset, the bankers say. A
carefully designed digital euro will facilitate the transition of the
European society and economy into the digital age as public financial
authorities focus their efforts on preserving the integrity of the
monetary and payment systems, the ECB officials conclude.
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