Creating the digital euro would promote using a single currency at the international level.
Key facts
- Security could facilitate the international adoption of a digital currency.
- The global attractiveness of a currency depends on fundamental economic forces.
- Creating a digital euro could boost the international status of the European Union currency. It would facilitate its use to pay or save.
The assertion emerges from the report issued this Wednesday, June 2, by the European Central Bank (ECB) in the “Central bank digital currency and global currency.” Massimo Ferrari and Arnaud Mehl prepared it. The report, signed by Christine Lagarde, President of the ECB, establishes several scenarios. In them, the need to issue a digital euro can become important.
The text underscores that the global attractiveness of currencies depends on fundamental economic forces that digitization is unlikely to alter. These determining factors include, for example:
- The size of the issuing economy in terms of world trade and finance
- The soundness of economic policies
- The depth and liquidity of financial markets
- The inertia in the use of international currency.
However, according to the ECB, some characteristics could facilitate the international adoption of a digital currency, such as security, low transaction costs, and the effects of bundling in auxiliary services, leading to networked economies and many advantageous benefits.
Regarding security, Ferrari and Mehl point out that a digital euro would help mitigate the risks associated with traditional forms of payment for cross-border transactions of goods and services. Among these risks, they mention counterparty risks in correspondent banking relationships.
According to the report, these characteristics can create positive feedback loops using a currency as a store of value and payment mechanism and affect its global attractiveness.
An international digital currency would ease currency substitution
Furthermore, the report alleges that the availability of a global digital currency could facilitate currency substitution in countries with unstable currencies and weak fundamentals. A digital currency would enable your coins’ total or partial substitution for a digital currency for payments, savings mechanisms, and units of account.
The report indicates that issuing a global digital currency would strengthen the underlying money (EUR, USD, etc.). Still, it would also reduce monetary policy independence in the economies using digital currency.
Finally, the document calls attention to the risks to stability that could arise if a central bank does not offer a digital currency. For example, the paper says that non-local providers dominate domestic and cross-border payments could become a concern.
“A Digital currency could threaten the financial system’s stability. Still, both individuals and traders would be exposed to a small number of predominant providers with substantial market power and the ability of central banks to fulfill their monetary policy and policy mandate. As a result, their role as last-resort lenders would be severely affected. The issuance of a CBDC (Central Bank Digital Currency) would help maintain the autonomy of national payment systems and the international use of a coin in a digital world.”
Report of the European Central Bank
Europe could have its digital euro in 2 to 4 years
At the general level, the issuing of the digital euro could start to flow within two to four years, as Christine Lagarde said. The ECB is still making preparations that are near completion, explained the head of the ECB.
Lagarde highlighted on that occasion that developing the digital euro “would take time.” The authorities will have to attend to developing the technology underlying the currency, probably a blockchain. They will also have to determine the money laundering controls and the prevention of terrorist financing to which this new euro will be subject.