The European Central Bank (ECB) has stated that a Central Bank Digital Currency (CBDC) or digital euro may be needed to battle the new normal of “artificial currencies” dominating cross-border payments.
In an annual review of the euro called “The international role of the euro,” released by the ECB, economists Massimo Ferrari and Arnaud Mehl conveyed concerns about the steady demand for artificial currencies created by unnamed “foreign tech giants” stating, “One concern could be a situation in which domestic and cross-border payments are dominated by non-domestic providers, including foreign tech giants potentially offering artificial currencies in the future.”
They further added, “Not only could this threaten the stability of the financial system, but individuals and merchants alike would be vulnerable to a small number of dominant providers with strong market power.”
This is not the first time that the ECB has expressed concerns over the rise of artificial currencies or stablecoins in Europe and has asked European Union (EU) lawmakers to intervene with veto powers to combat private stable projects such as Facebook’s Diem coin.
The ECB has considered launching a digital euro, with ECB’s president, Christine Lagarde noting in January that, “It’s going to take a good chunk of time to make sure it’s safe. I would hope that it’s no more than five years.”
Massimo Ferrari and Arnaud Mehl’s report took into account several scenarios in which the need to issue a digital euro may become important.
The two economists emphasized the need to fight big tech firms for payment products and services and noted that pushing a digital euro with complementary services could be a way to do so. They stated, “A CBDC could facilitate the digitalization of information exchanges in payments through e-invoices, e-receipts, e-identity, and e-signature, allowing intermediaries to offer services with higher value-added and technological content at lower cost.”
The report went on to say that releasing a digital euro may also be needed to enhance current cross-border payment infrastructures. Massimo Ferrari and Arnaud Mehl noted that a digital euro could negate the need to use foreign currencies for international transactions and reduce the costs associated with doing so. On this, the pair stated, “Low transaction costs and bundling effects could increase its appeal for invoicing cross-border transactions, as a means of payment and as a unit to settle current transactions.”
The report spoke on the design features of a CBDC which is believed to be important for global outreach. The economist emphasized the need to encourage the use of a digital euro through interoperability, the anonymity of users and being able to conduct offline payments. However, the economists stressed that anonymity would also have to be tempered with the need to have enough information on CBDC users to “build safeguards” and identify misuse of funds for terrorism financing, cross-border criminal activities and money laundering.