The European Central Bank (ECB) may launch a Central Bank Digital Currency (CBDC) by next year, allowing citizens access the fiat money in digital form for the first time. The initiative, which awaits legislative passes, intends to modernize European payment systems, preserve the EURO’s influence globally, and reduce dependence on foreign providers.
Coming only behind the U.S. dollar, the euro makes up about 31% of foreign exchange market turnover and about one-fifth of global foreign exchange reserves. Some say the move is a cautious approach that ducks systemic issues like entrenched banking power, while others view it as intrusive state meddling in a thriving world of global digital payments.
Critics on both ends of the divide maintain their arguments, but there are neutral concerns about the eventual future of this project. Can the digital euro deliver meaningful change in shaping or reshaping the future of money, or will it turn out to be another white elephant project? The rest of this review provides expert insights and analysis in solving the dilemma.
ECB’s Plans for the Digital Euro
The world has seen private money and central bank money coexist "peacefully." Why do we need some antiquated methods now in the regional governing bank? We certainly want to hear from the horses' mouths first.
The European Central Bank in Frankfurt | Yay Images
To the ECB, a Digital Euro envisions a secure and private Digital Euro – that's usable online or offline and accessible via wallets from authorized middlemen and banks.
As of this writing, no single European digital payment system covers the entire currency block, leaving much of Europe relying on non-European card networks. Such reliance on non-European card networks is something the Digital Euro wants to curb while boosting the region's strategic autonomy.
To avoid destabilizing the banking sector, the ECB plans to set holding limits and pay no interest on Digital Euro balances. That way, it can create a middle ground that provides a public digital currency without radically disrupting the financial banking landscape.
Per privacy concerns, neither the ECB nor any EU institution will hold individual user data. Accounts will remain under the management of payment service providers with hopes that the offline version will remain as ubiquitous as cash. Ultimately, the ECB wants to provide a secure and private tool, rather than a surveillance medium.
Criticisms Have A Say Too
Professor Dirk Niepelt, a macroeconomics expert at the University of Bern who leads the CEPR Research and Policy Network on FinTech and Digital Currencies, wants the ECB to be more deliberate. "To become a true game changer, a retail CBDC would need to reduce the societal costs," the professor says.
These expenses include economy-wide challenges that stem from banks being central payment providers. Additionally, Nieplt thinks the ECB wants to also address issues like excessive bank market power, fragility, and excessive trust in systems ahead of a Digital Euro launch. In his words, "Introducing it with the condition of protecting bank business models is too narrow of an approach."
Worse still, skeptics like Nicholas Anthony of the Cato Institute see no authentic need for a retail CBDC. To Nicholas, a CBDC doesn’t come across as being innovative enough. “One of the biggest issues with CBDCs is they do not solve any problems that are not already being dealt with in the market,” he explains. “To the extent there are any benefits of CBDCs, those benefits rest in the hands of government officials seeking greater surveillance and control over how people use their money.”
Brunello Rosa, Honorary Visiting Professor at City, University of London, offers an entirely different and optimistic view. "The Digital Euro could assert strategic autonomy. Safe, public digital money can anchor trust in the broader digital asset ecosystem, allowing stablecoins and other private solutions to thrive alongside it."
Is There Global Competition with Crypto?
Crypto Coins | Yay Images
Nearly every G20 country is exploring a Central Bank Digital Currency, with 19 of them already in advanced stages of CBDC exploration. Notable mentions among these include Brazil, Japan, India, Australia, Russia, and Turkey, each piloting their digital currencies to assert economic sovereignty and streamline payments. Here's the backdrop against which the Digital Euro plans lie.
China's Digital Yuan leads the CBDC race, with over $1 trillion gone into transactions. Its launch highlights China's intentions to establish a public virtual currency as a pillar of this payment system, demonstrating its ambition to explore state-backed payment infrastructures.
But, critics think the Digital Yuan could also sponsor state surveillance, igniting debates about user privacy and the appropriate balance between public and private roles in innovation, alongside individual freedoms.
The United States, which has been largely conservative with regard to virtual coins, is in stark opposition to its peers. It has objected to introducing retail CBDC over privacy concerns, thinning lines between public and private market roles, and the burden of financial stability.
Proponents of the U.S.' stance argue that it prevents unnecessary government interference in an already competitive private payments market. However, critics warn that the US risks being left behind in a global race for digital currency influence and innovation.
Europe will define the exact holding limits closer to the potential launch based on a well-defined governance process established in the draft Regulation. Plans to finalize the digital Euro rulebook are underway, to provide a clear set of rules and standards to ensure a consistent user experience across the Euro area, amid movements to protect key technical aspects like privacy and functionality.
Final Thoughts
Europe preaches a rather cautious approach that achieves strategic autonomy without compromising personal privacy or crowding out the private sector with its digital Euro launch plans. The ECB’s CBDC seeks to ensure financial stability and reduce reliance on non-European payment networks.
But critics think things could get a little too excessive on either side with privacy concerns on the one hand and private sector protection on the other. So, will the Digital Euro succeed in reshaping the future of money or fail?
As it stands, implementing a verifiably secure and private digital currency process may go a long way in setting a new standard. While we may be spared for not expecting too much from the project, we won't be surprised if a state-backed digital currency redefines how users spend and receive funds globally.