Mark Zuckerberg’s Libra creation announcement in June 2019 sent earthquake-like effects through the world’s major central banks. Although the project was finally abandoned in January 2022, the stable coin project dreamt up by the Californian giant prompted sovereign monetary institutions to rapidly accelerate their thinking regarding the creation of Central Bank Digital Currencies (CBDCs).
The possible emergence of private virtual currencies managed by major technological firms on a global scale conjured up an image of a dystopian future of mega-corporations for many and highlighted the risks involved. Systemic risks that linked to the potential number of users (Meta boasts over 2 billion active users), threats to financial stability and monetary policy, as well as dangers for consumers, particularly in terms of data protection.
A few months after Zuckerberg’s announcement, the European Central Bank (ECB) turned its attention to the question of the digital euro, and the project is gradually taking shape. The Commission wants a digital euro account available to every individual and banks and PSPs they will have to provide this free of charge (including transactions). But today, as the project takes shape, the question that arises is whether citizens and economic players in Eurozone countries really have need of a CBDC. In fact, various parliamentary sessions in the UK and USA have culminated in the idea that a CBDC represents “a solution in search of a problem,” recalls Thibault de Barsy, Vice-Chairman and General manager of the Payments Association EU. A digital euro would not solve problems facing the European payments industry. At best, it would only be an additional tool.
Challenges for commercial banks
A digital Euro will, for all intents and purposes, be a digital alternative to fiat currency – one that is backed by a central bank. In this sense, it will be closer to fiduciary money than to card payment methods that use private money created by commercial banks. However, the form it will take and the method for circulation and holding remain to be determined. For now, it is assumed commercial banks will act as intermediaries between citizens and the central bank, enabling each individual, or household, to benefit from a digital euro account. A somewhat unnatural collaboration, given that the ECB’s digital currency would compete directly with the role of commercial banks.
There is a risk that the credit market could dry up if customers choose to place their savings in a digital euro account.
“It’s competition on two levels,” explains de Barsy. “Firstly, as it is competing solution to that of commercial banks. However, above all, it’s because there is a risk that the credit market could dry up if customers choose to place their savings in a digital euro account.” This, of course, could provoke a “bank run” in the event of another banking crisis. To avoid a massive transfer of savings from commercial bank accounts to an ECB-guaranteed digital euro account, certain options are being discussed, in particular a limit on the amount of digital euros that can be held. At the moment, the figure stands at €3,000. This would also reduce the risk of disintermediation.
In view of these constraints and the possible risks involved, once must wonder about the positive, rather than merely defensive, aspects of the project. What benefit could a CBDC bring to consumers? “The acceleration of digital payments is clear, and the decline of cash, which was undoubtedly boosted by the Covid crisis, is driving the need for digital payment solutions,” highlights Martina Fraschini, Assistant Professor of Digital Finance and the University of Luxembourg, as a preliminary remark.
Cost, speed, and inclusion
In terms of true advantages, she emphasises the speed at which a payment could be made, immediate rather than a delay of one or two days for a cross-border payment, as well as a reduction in terms of the cost of commissions. In countries where bank accounts are less systematic than in the European region, a CBDC also represents inclusion; whatever their financial situation, everyone can benefit from a free account.
To maintain their relationship with clients, banks will need to improve services and offer better terms.
The fact that the infrastructure still needs to be put in place gives commercial banks an important role. Additionally, the creation of a new central bank payment instrument will compete with commercial banks also creates a boon for consumers. “To maintain their relationship with clients, banks will need to improve services and offer better terms. While banks will be reluctant to embrace a digital euro given the risk it poses to their business, they should see it as an opportunity to deepen existing relationships,” muses Fraschini.
At present, the debate remains fairly moot given that the ECB could bury the project after weighing pros and cons. Nonetheless that is unlikely. However chaotic, the rise of cryptocurrencies is forcing major central banks to prepare sovereign alternatives and Europe cannot afford to fall by the wayside. “The best strategy is to be ready with a CBDC, even if we have enough payment solutions to do without one,” emphasises de Barsy.