In a stark warning, the European Central Bank (ECB) said in a report published today that governments that opt out of introducing central bank digital currencies (CBDCs) may face threats to their financial systems and monetary autonomy.
CBDCs are digital versions of fiat currencies, which in the case of the European Union, would be a digital version of its currency, the euro. They are similar to stablecoins, which are pegged at a 1:1 ratio with a particular fiat currency.
The report, “The international role of the euro, June 2021,” said one risk of failing to introduce a CBDC comes from concerns of “foreign tech giants potentially offering artificial currencies in the future.”
While the report did not name any names, the ECB likely had in mind Facebook—the Diem Association, of which Facebook is the main backer. Last month, the project said a pilot version of its digital currency, a stablecoin, is on the way.
“[T]he ability of central banks to fulfill their monetary policy mandate and role as lender of last resort would be affected,” reads the report.
Pieter Cleppe, EU policy analyst at Property Rights Alliance (PRA) and formerly the Brussels head of the think tank Open Europe, said that while the ECB sees a potential threat from big tech, private banks also feel equally threatened by the ECB’s digital euro.
“A digital euro would strengthen the role of the ECB within the banking system, to the detriment of private banks,” Cleppe told Decrypt. “This means that any monetary expansion would lead to inflation much more quickly as private banks would no longer be there to prevent all that money from flowing into the real economy.”
Building a CBDC for the European Central Bank
Governments are often interested in launching CBDCs because digital fiat currencies make it easier to analyze financial transactions and cheaper disburse money in crisis times.
“Just like the Chinese digital yuan, the ECB’s digital euro is ultimately meant to track users. This runs counter to the fundamental spirit of cryptocurrencies, which at their core attempt to liberate money from state control,” Cleppe told Decrypt.
Unlike cryptocurrencies, CBDCs aren’t typically meant to be on a decentralized blockchain, as the central bank would seek to maintain clear authority over the ledgers. The ECB has yet to make up its mind about its choice of the underlying technology.
In April, it quizzed the public about its CBDC plans and found that half of the respondents think blockchain could deal with counterfeits and resolve technical glitches.
There aren’t many governments in a rush to launch digital versions of their currencies, however.
The Bahamas launched its sand dollars in October. In the same month, China’s digital yuan, which is still in pilot and is the most advanced CBDC project from a major economy, had processed transactions worth 1.1 billion yuan.
But other countries, like Britain and Japan, are taking their time to mull it over. The latest report suggests the ECB is doing the same.