The benefits and risks of a “digital euro”
After Facebook announced its digital currency in 2019, regulators said it could be a threat to the central banking system. But, the European Central Bank has revealed that it will probably go ahead with its own electronic currency, the digital euro.
Although the final decision will be made in spring, if it does go ahead, it will be a complex project. It would also be in competition with Facebook’s “Diem” currency, as well as potential digital currencies that could be introduced by countries like China.
Other central banks are now exploring the idea further in a bid to protect monetary sovereignty. Facebook’s currency could reach 2.7 billion users and would transform international banking.
If the plans go ahead, digital euros could be used to facilitate payments in Europe. Potentially, citizens in the eurozone would have access to a deposit account with the European Central Bank, and this would replace the bank’s current role as an intermediary.
However, this would bring its own risks. Many citizens would choose digital euros, which could lead to financial troubles if there was a chaotic transition. In addition to this, it could disrupt policy decisions in the financial industry.
The effects it would have on the banking sector are still being considered, and whether the project is successful depends on the transition and the details of the technology. It’s still not clear whether it would be powered in a similar way to other cryptocurrencies.
One of the main arguments for the new currency would be to gain the public’s trust. Unlike commercial banks, a central bank can’t go bust. This means lower risks for citizens, along with enhanced safety and, for many people, a more convenient option.
Earlier in the month, in a public consultation, the ECB said it would be carrying out test projects to see if a digital euro would be a viable option for the future. The idea has a lot of supporters in the European Commission and has great potential, but it also brings lots of challenges.