The popularity of cryptocurrencies and the growing interest from traditional banks and institutions have set off alarm bells at central banks, which are working to create these digital versions of their own currencies.
The European Commission is working on the idea of regulating a digital euro that arrives by early 2023, although this year the development of the first prototype of this cryptocurrency should begin. Having a digital euro seems clearly relevant for the Eurozone and the European Central Bank (ECB), which carries out internal tests. That cryptocurrency could hit the market in 2025 and would compete with China’s official cryptocurrency and the one under development in the United States.
Christine Lagarde, director of the European Central Bank announced in July 2021 that 80 central banks were interested in creating virtual currencies. Now the European Commission is preparing the legislation that will affect the digital euro. If they fulfill these plans, this regulation will be ready by the beginning of 2023 to start work on the prototype at the end of that same year. The legislation will have to go through a negotiation process with all the member states of the European Union.
Doubts about whether it could destabilize the European financial system
The EU is planning to launch a public consultation process in a few weeks that will seek to confirm, for example, how European citizens would use the digital euro. Mairead McGuinness, the EU’s chief financial officer, announced those plans Wednesday at a conference.
After the public consultation, the EU will make an assessment of the impact that this digital euro could have on a potential destabilization of the financial system. The digital euro could considerably alter the role of conventional commercial banks: they would lose their leading role, causing a possible decrease in liquidity if people trade their money to this digital currency regulated and managed by the ECB.
There are central banks that want to prevent the cryptocurrency boom from becoming a threat to their official currencies. That digital euro “would complement the cash, it does not come to replace it,” they explained at the ECB.
The digital euro would be the answer to the appeal of cryptocurrencies such as Bitcoin or Ethereum, which people rarely use for daily trading operations, but have derivative or alternative cryptocurrencies that seek to become protagonists in these areas.
Although it is the Governing Council of the ECB that has the last word on the need for a digital euro, policymakers at the Commission and across Europe are convinced, according to Politico.
Last year, Germany and France urged the ECB to speed up the process, fearing the Eurozone would be behind. It is worth remembering that the People’s Bank of China began its journey towards a digital Yuan in 2014. The Indian Ministry of Finance, likewise, has committed to having a virtual version of the rupee by the end of this year.
Eurogroup President Paschal Donohoe has also included the digital euro on his political agenda for finance ministers to discuss.
How different the digital euro is in comparison to other cryptocurrencies
The digital euro will allow families and companies to deal directly with this currency, by using an account opened at the ECB, which is currently reserved for commercial banks.
There will be the protection of that money from all risk of loss, a strong argument at a time when the deposit guarantee project in Europe is stalled.
Moreover, the ECB promises fast, easy, and secure use when paying in a supermarket or online through a mobile phone application, for example.
According to the AFP agency, the goal will be “to persuade consumers to switch to a new means of payment that does not differ much from the existing ones in terms of treatment “and range of services,” said Heike Mai, an economist at Deutsche Bank.
“Consumer payment habits will not change with the launch of the digital euro,” predicted Guido Zimmermann, an analyst at LBBW. However, the system could evolve in a few years, when the number and forms of digital currencies have increased, he said.
The risks of a digital euro
The ECB must seriously consider the concerns of Europeans about the risks to the protection of their privacy, a priority that emerged from a recent consultation of the institution.
Data must be more protected with the digital euro than with the equivalents proposed by private borrowers, says the ECB.
The main risk is the flight of savers towards this new form of currency, which makes it possible to avoid the rates of a classic deposit account, which could weaken banks in the euro area.
For this reason, the ECB is studying taxing currency deposits above a certain amount, for example, 3,000 euros, said Fabio Panetta, a member of the ECB’s board of directors, in an interview with the Financial Times.
In addition, there is no intention to widen the existing digital gap within societies. “We are going to continue to issue cash,” Panetta said.
By Audy Castaneda
