The Digital Euro’s Impact on Banking

With traditional fiat currencies increasingly challenged by new and popular virtual currencies, the ECB evaluates the feasibility of a digital supra-national currency, CBDC, that can act in parallel with physical money.

Sequentially, this write-up explores the advent, adoption, and future of the digital Euro and how it will impact the banking sector.

Central Bank Digital Currencies

Traditionally, central bank money or public money was only available to the public in the form of cash, that is, coins and banknotes. The other source of money is private money, which is supplied by commercial banks, mainly in the form of loans. This is being modified and developed to present a digital equivalent of central bank money, thus deepening public money in the digital economy.

Suffice it to say that CBDCs are quite popular on a global level. Central banks have already started research, prototyping, and pilot implementations independently or with other institutions. One of the well-known projects is Project Stella, which is the cooperation between the Federal Reserve, the Bank of England and the European Central Bank. Since 2020, the ECB has been exploring the possibilities of a digital currency.

Looming Threat on Commercial Digital Currencies

Commercial digital currencies that rely on distributed ledger technology, like Cryptocurrency and Stablecoins, have emerged in the last decade alone. These types of currencies may hinder the ECB plan of implementing monetary policy, hence predetermining the economic independence of the Eurozone countries. At the same time, Facebook/Meta’s cancelled Diem (Libra) expanded the possibilities offered by CBDCs.

Using retail CBDC could act as a countervailing measure to commercial digital currencies, which pose a threat to central banking by making entry into the payment systems market more difficult. Public money has to remain the monetary anchor in Europe, so the ECB is keen to develop the digital Euro.

Also, the adoption of CBDCs has the special advantage of enabling a realignment of settlements beyond the incumbent and costly structures. This could improve the definitiveness, convertibility and credibility of payment settlements, making a CBDC the ideal digital currency.

The Digital Euro: Development and Potential

Since its pioneering in 2020, the digital euro project’s main goal has been safeguarding central bank money’s role in the digital age. And unlike other CBDC projects that put much weight on wholesale applicability, the ECB’s project focuses on a retail CBDC accessible to all citizens and businesses alike.

Below are the three primary reasons for pursuing the digital Euro:

1. The potential decline in the role of cash as a monetary anchor.
2. The inability of private providers to replicate central bank money.
3. The dominance of non-European digital providers in the European market heightens risks from foreign-controlled technologies.

Research shows that for a digital euro to be effective and accepted, it must be useful, widely adopted, inexpensive, fast, secure, and adequately protected by the consumer. Also, there is a need for privacy protection and increased financial fanaticism on the Internet.

The Future of the Digital Euro

With increasing publications and ongoing research, the ECB is committed to ensuring that the digital euro will:

• Complement but not replace cash.
• Be linked to the Euro.
• Be accessible to all residents of the euro area.

With several implementations in 2024, several architectural choices will be made during this period, and mastering the opportunity to cooperate with giants like Amazon, Nexi, Worldline, CaixaBank, and the European Payment Initiative indicates that the strategy will involve commercial banks.

Online and Offline Functionality

Currently, the ECB is trying centralized and decentralized approaches, including DLT. Based on a token, it is possible to introduce payments without connecting to the Internet, which will create a cash-like element in the digital Euro in an attempt to solve the problem of increasing privacy and the requirements of a digital currency that can seamlessly integrate into both the physical and virtual world.

Conclusion

Ultimately, the digital Euro is an important step in the evolution of central bank money in response to the modern problems of commercial digital currencies and the digital economy. During the investigation and development stages of this venture by the ECB, the effects on the commercial banks and a more systemic level are still a major point of concern. Consequently, the digital Euro will complement fiat currency to maintain the Eurozone’s control and improve payment speed, stability and inclusivity.

Image Source: Adobe Stock

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used for legal, tax, investment or financial advice.