ECB Continues to Cite Benefits of Digital Euro, a Potential Boost to International Currency Use

Specific design features can incentivize the use of digital Euro for non-resident as means of payment, unit of account and store of value.

ECB’s Report

In a report published on Wednesday, the ECB has warned that the failure to launch a Central Bank Digital Currency (CBDC) will result in other players dominating the payment industry both for the domestic and cross-border market. Euro Dollar, the second most used currency in the world, faces new challenges in forms of ‘artificial’ currencies by foreign technology giants. Citing Facebook’s ‘Diem’ which was formerly ‘Libra’, as a threat to financial stability.   


In the report, ECB recognises characteristics that are specific to digital payment such as safety, low transaction costs and bundling effect. Allaying any fears that CBDC will open a new can of worms, ECD states that adoption alters nothing from the existing system. Digital currency and the financial system are only affected by fundamental economic forces. On the other hand, these additional features in digital currencies are positive feedback loops that have global appeal.  


It is a Race for CBDC

Governments around the world are eyeing the use and implementation of digital currency. Some are still observing whilst others have taken the leap of faith. News of CBDC ambitions have been flooding the market. One of the early adopters is China. It has been rather progressive and successful in its cashless payment solutions by adopting Alipay and WeChat Pay. The Chinese government in its digital yuan initiative has been making trial runs of the digital currency by giving handouts to a selected pool of individuals that allows for e-commerce use and also by giving ‘red packets’ to 200,000 lucky lottery winners. 

Indonesia, Mauritius, South Korea and South Africa are amongst the countries that have announced their plans to proceed with digital currencies. With technology and progress, the current physical bills are seen to be cumbersome and clunky. There are a considerable amount of costs related to its use that makes it not economical. 

Euro Replacing the Greenback?

The U.S. dollar is still the dominant currency used for international trade. It is also the dominant currency used as reserve currency across the world. At the rate the Biden administration is handing out stimulus, there is fear that eventually inflation will catch up. This uneasiness would cause those holding the U.S. dollar to balance their risks by adopting other currencies which can be used internationally. While the Yuan seems to be leading, the Euro is definitely one of the currencies in contention. 

In a speech by Fabio Panetta, member of the executive Board of the ECB in an online seminar said,  “A digital euro represents a natural evolution in response to this transformation – not only to underpin efficiency and innovation, but also to preserve the role of the central bank in offering safe means of payment.” 

Whilst it is difficult to see the EURO overtaking the U.S. Dollar within the near future, it can definitely reduce the dominance. A safe, secured and trusted form of currency will have its appeal. 

Can CBDC Play the Role of Cryptocurrencies 

The use of digital currency is definitely a step forward for any sovereign state. Digital currency, if adopted, will be classified as a legal tender. The main difference between the two is the concept of ‘permissioned’ and ‘permissionless’ systems. The latter is a decentralised structure whilst the former isn’t. In a nutshell, a digital currency is a watered down version of a cryptocurrency through the use of the distributed ledger technology that can impose restrictions and limitations. One can never replace another.

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