05 Sep 2023

Editorial - European Central Bank Digital Currency is Coming Navigating the Path to an EU-wide CBDC

By Stephan Pouyat, Senator for EU at The World Business Angels Investment Forum, Affiliated partner of the G20 Global Partnership for Financial Inclusion (GPFI)

Brussels, August 31, 2023: The European Central Bank (ECB) has announced that its Board of Directors will unveil its momentous decisions in Athens, on October 26, 2023. These plans extend beyond the usual topics we expect the ECB to address, such as interest rate adjustments, to actually make Eurozone history – with the introduction of a digital euro.

Since the euro was launched on January 1, 1999, not much has happened in the financial field that had a direct impact on Eurozone citizens. This is about to change. This innovative project marks a significant stride toward reshaping the financial landscape. As was the case back in 1999, worries and concerns always arise when a revolutionary shift takes place. In this case, however, I am convinced the paradigm change will make Europe stronger and more competitive for our industries and our people. I am a strong believer in Europe as one continent, one president, one paper-based currency and one digital currency.

Like any union of nations, the European Union is only as strong as the trust and support of its citizens. That’s why we need to move away from self-interested thinking among individual European countries if we want to protect our core values and remain competitive. We need to reaffirm our belief in the concept and become even more proud to be European citizens.

And there is much to be proud of: the EU has brought peace, stability and prosperity. It has weathered storms and resisted forge forces that threatened to foster disunity. The EU is also a strong voice in the international arena, espousing values such as human rights, equality and opportunities for all, while working with countries in less developed geographies to address their challenges.

This last point is not trivial: by 2050, the EU-wide population will be under 400 million, while Africa alone will reach a population of 2.5 billion. If we want to still be able to help our African counterparts, we first need to become stronger, together.

It is undeniable that competition between nations is growing, as demonstrated at the recent BRICS+ gathering. Financial capital will naturally shift from the Global North to the Global South. This is inevitable. Competition is good and healthy, as it forces us not to become complacent. At the same time, it is urgent for Europe to redefine its relationship with this new financial world order.

I trust in the strength of our resilient European population, in our people and in their courage to redesign Europe for our young generation. Our kids need ambitious and visionary leaders to give them the reassurance of a bright future.

It is within this context that I urge European citizens to embrace the introduction of our European central bank digital currency (CBDC) with force and determination.

The future ahead is bright for those who are unified, proud of their own nations and the transnational union we have created, who are technologically savvy and who know how to build modern human-centric digital economies.

In this context, we need to be wise and ambitiously prudent. I have been fortunate to learn this on the ground during my past 20 years at Euroclear Group, the largest international clearing and settlement cross-border platform in the world, with €33tn of assets under custody. It is time now for me to give back to society what society has given me over the course of my professional career, which is why I take pleasure in sharing a set of pros and cons that deserve careful consideration concerning the introduction of an EU-owned digital currency.

Pros of CBDC implementation:

1. Enhanced financial inclusion: One of the primary merits of a central bank digital currency is its potential to foster greater financial inclusion. In a world where traditional banking services may not be accessible to everyone, the digital euro can serve as a tool to provide individuals with access to basic financial services, narrowing the gap between different economic strata.

2. Reduced transaction costs: The digital euro could revolutionize the way transactions are conducted by significantly reducing the costs associated with traditional banking operations. With streamlined cross-border transactions and decreased intermediary involvement, the digital euro could lead to cost savings for both businesses and consumers alike.

3. Improved monetary policy transmission: A central bank digital currency would provide policymakers with a more direct and efficient way to implement monetary policy. This enhanced control over money supply could allow for more precise adjustments during economic fluctuations, aiding in stabilizing the economy.

4. Counteracting private cryptocurrencies: The proliferation of private cryptocurrencies has sparked debates about the role of governments and central banks in the financial sector. But more importantly, it has spiked corruption and uncontrolled behaviors, based on false declaration and abuse of trust – precisely the opposite of what those currencies claim to bring to the market. Unlike private cryptocurrency, CBDC is backed by the sovereign wealth and credit of a national treasury. It is a digital version of the paper currency, which in and of itself has no intrinsic value beyond the credibility of the issuing central bank. By introducing a digital euro, the ECB will offer a secure and regulated alternative to private cryptocurrencies, mitigating some of the risks associated with unregulated digital currencies.

Cons of CBDC implementation

1. Data privacy concerns: Our commercial banks have already collected and stored a significant amount of our personal financial data. Those are necessary to comply with anti-money laundering (AML) and know your customer (KYC) obligations. The introduction of a CBDC would involve the collection and storage of the same personal financial data. This, understandably, raises concerns about data privacy and security, necessitating robust measures to protect individuals’ sensitive information from potential breaches or misuse, as it is already the case with our commercial banks.

2. Technological infrastructure challenges: The successful implementation of a digital euro relies heavily on a robust and secure technological infrastructure. Ensuring widespread access to digital wallets, safeguarding against cyber threats and overcoming potential technological bottlenecks are formidable challenges that demand meticulous planning and investment. Those are real challenges, but not unsurmountable ones.

3. Disintermediation of banks: It is a misconception that the digital euro could potentially erode the role of traditional banks as intermediaries in financial transactions. New forms of competition among commercial banks will undeniable arise, which could lead to a reshuffling of the financial industry and pose challenges to the profitability of traditional banks, requiring careful consideration of regulatory adjustments. Yet, at the same time, it will open up space for innovation and creativity to hundreds of European fintech players and beyond.

4. Monetary policy complexity: While the digital euro offers improved control over monetary policy transmission, it also introduces a layer of complexity. The ECB would need to balance traditional monetary tools with new digital mechanisms, potentially leading to unanticipated interactions that require thorough analysis and adaptation.

5. Potential for capital flight: Although I personally do not believe in it, the introduction of a digital euro might inadvertently encourage capital flight during periods of economic uncertainty. Depositors could quickly convert their holdings into digital euros and transfer them across borders, potentially exacerbating economic instability. Careful monitoring and controlled measures would need to be put in place to prevent such capital flight.

On October 25, 2023, the digital euro will join the digital renminbi and the digital rupee. Together, these three currencies will foster new dimensions, whether in currency notes, bonds or treasury bills. While digital rupee and renminbi are in various stages of rollout, it is safe to say that CBDCs are an important milestone in evolving the long-dominant patterns of global finance.

The forthcoming decision by the European Central Bank regarding the digital euro is poised to reshape the financial landscape in ways both transformative and challenging. The potential for enhanced financial inclusion, reduced transaction costs and more effective monetary policy transmission underscores the allure of a central bank digital currency. Yet, data privacy concerns, technological infrastructure hurdles and the need to strike a delicate balance between innovation and stability must not be underestimated. As the Eurozone navigates this historic juncture, careful evaluation of the pros and cons will be paramount in ensuring the successful integration of the digital euro into the global financial ecosystem. Based on my experience and knowledge of global financial ecosystems, I welcome the development and encourage colleagues across Europe and beyond to join me in supporting the digital euro.