On Wednesday, June 2nd, the European Central Bank (ECB) issued a report that highlights the threat to monetary control for countries that decide not to launch a central bank digital currency (CBDC) of their own.
The report titled The International Role of the Euro, led with, and lauded, the stability and global use of the euro fiat currency in the months following the COVID-19 pandemic, stating that “…the euro remains unchallenged as the second most widely used currency globally after the US dollar.”
However, a large section of the report focused on the risks of EU member countries that may decide against CBDCs. The primary threat stated in the position paper, was that “foreign digital money” could leapfrog adoption of a digital euro, becoming the accepted standard for domestic and international payments.
The Report on the digital euro set out several scenarios in which the need to issue a digital euro may become important. For example, in the event that the use of cash in the euro area declined significantly, in order to provide access to central bank money in an increasingly digital economy, or if foreign digital money were to largely displace existing domestic currency means of payment.
The report also specifically named as a critical consideration, “…foreign tech giants potentially offering artificial currencies…” – which is a thinly veiled reference to Facebook’s Diem coin, Binance Coin and Amazon (NASDAQ:AMZN), which is reportedly considering its own digital currency.
One concern could be a situation in which domestic and cross-border payments are dominated by non-domestic providers, including foreign tech giants potentially offering artificial currencies in the future. Not only could this threaten the stability of the financial system, but individuals and merchants alike would be vulnerable to a small number of dominant providers with strong market power, and the ability of central banks to fulfil their monetary policy mandate and role as lender of last resort would be affected.
The ECB is rightly concerned that monopolistic control on printing, lending, and manipulating money in general is slipping away. The report states that CBDCs represent the best chance for governments to keep some semblance of control on monetary supply and fiscal policies in the future. The report concludes with the following summation:
Issuing a CBDC would help to maintain the autonomy of domestic payment systems and the international use of a currency in a digital world.
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