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European Parliament paper pours cold water on digital euro

European Parliament paper pours cold water on digital euro

The risks of rolling out a digital euro currently outweigh the benefits and a CBDC should not be introduced unless "new elements " emerge, says a paper prepared for the European Parliament.

While a final decision on issuing a digital euro has yet to be made, the European Central Bank has been busy investigating options ahead of a potential launch, which would come in 2026 at the earliest.

Meanwhile, the European Parliament’s Committee on Economic and Monetary Affairs has called in the Economic Governance and EMU Scrutiny Unit to carry out its own assessment.

In a paper, titled Digital Euro: When in doubt, abstain (but be prepared), the unit says that the ECB should continue to explore the CBDC , including carrying out a testing phase.

However, the paper continues, the ECB should "in the end not launch a PDE [potential digital euro] unless new elements emerge strongly supporting such a decision. At the present time, the risks and imponderables of this enterprise are stronger than the arguments in favour of it".

Explaining its conclusion, the unit says that launching a digital euro would put the ECB in a new position: that of offering a new payment instrument in competition with banks and other payment service providers.

"It is not clear that there is a market niche for a PDE, nor that a PDE would have a good chance of establishing itself in today’s highly diversified, competitive, innovative, and fast moving retail payment industry."

A digital euro would also need to hit the goldilocks spot of not being a flop but not being so successful that it would hurt the commercial banking sector. Meanwhile, a digital euro would accelerate a bank run during a crisis because it would offer easy access to a riskless alternative to a bank deposit, says the paper.

Finally, a digital euro is unlikely to increase financial inclusion in the eurozone but could help solve the longstanding problem of the high costs and delays of cross-border workers’ remittances.

Read the full paper:

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Comments: (2)

Marten Nelson
Marten Nelson - M10 - Stockholm 11 May, 2023, 05:41Be the first to give this comment the thumbs up 0 likes

This paper was published nearly a month ago. Since then, the committee has published three additional assessments of ECBs two progress reports. As they should, the committee collects opinions from external scholars. It would have been prudent in this article to refer to all digital euro related publications by the ECON committee. https://www.europarl.europa.eu/committees/en/econ/supporting-analyses/latest-documents

Richard Garnier
Richard Garnier - Capital Horizon - Stockholm 11 May, 2023, 14:35Be the first to give this comment the thumbs up 0 likes The recent paper prepared for the European Parliament, titled "Digital Euro: When in doubt, abstain (but be prepared)," offers a cautious stance on the potential launch of a digital euro. While the paper acknowledges the risks associated with central bank digital currencies (CBDCs), it fails to recognize the opportunities presented by private stable coins and proxy CBDCs. As a stablecoin issuer, ARYZE has a unique perspective on the matter. We agree that the risks of rolling out a CBDC far outweigh the benefits, especially considering the lack of consensus among central banks on the definition and implementation of CBDCs. The current exploration into CBDCs appears to be an extreme reaction to the rise of cryptocurrencies and a fear of being left behind. However, we believe that the future of digital currencies lies in the democratization of money, where programmable money and stable coins can be issued in various formats without the direct involvement of national banks. Central banks cannot issue CBDCs as true programmable money that operates on open-source blockchains; this would enable people to trade them on third-party exchanges, inadvertently creating a new scarce instrument or forcing central banks to mint digital currency parallel to traditional printing. The paper rightly points out that launching a digital euro would put the European Central Bank (ECB) in a new position of offering a new payment instrument in competition with banks and other payment service providers. However, this is precisely the reason why central banks should not directly issue CBDCs. A government-issued CBDC would outcompete existing banks and payment providers, disrupting the established infrastructure. ARYZE believes in the potential of private stable coins and proxy CBDCs as a viable alternative. This approach supports the improvement of existing infrastructure and promotes interoperability among banks, central banks, and financial service providers. Countries like Denmark and Sweden have already adopted fully digital and modern infrastructures for digital money management, providing a model for other nations to follow. Contrary to the paper's assertion that a digital euro would not increase financial inclusion, we believe that Europe, particularly Scandinavia, should be at the forefront of digital currency innovation. By leaning on our legacy infrastructure and not pursuing new services and solutions, we risk falling behind countries like China that are forging ahead in the digital currency space. In conclusion, it is essential that we shift the digital currency paradigm away from direct central bank involvement and focus on improving existing infrastructure while embracing private stable coins and proxy CBDCs. This approach will not only mitigate the risks outlined in the European Parliament's paper but will also pave the way for a more efficient, inclusive, and innovative digital currency landscape. Board member, ARYZE