The impending launch of a digital version of the euro has been a topic of much discussion in recent years. Seen as a European answer to the rise of digital currencies and an attempt to modernize its monetary system, the European Union’s commitment towards a digital euro has garnered both anticipation and skepticism.
With the global race to launch central bank digital currencies (CBDCs) heating up, European economists are raising eyebrows over the design and intent of the European Central Bank’s (ECB) approach to their Central Bank Digital Currency (CBDC).
Questionable Design Choices
Many financial experts and academics closely observing this journey have expressed concerns over whether the project will truly cater to the public or primarily serve banking intermediaries. A report from University of Bern economists Cyril Monnetm and Dirk Niepelt is the latest to throw a spotlight on design flaws in the CBDC initiative.
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In the comprehensive report penned by Monnetm and Niepelt, the ECB’s design choices for the digital euro are critically examined. The researchers state:
The project’s design choices raise doubts about the ECB’s objectives and strategy. Consequently, the digital euro might well be dead on arrival.
A significant point of contention mentioned in the report concerns the digital euro’s design which leans heavily toward protecting intermediary banks.
Such choices, including consumer holding limits of a few thousand euros and even lower limits for merchants (zero in some cases), might make the CBDC less attractive for mainstream adoption, according to the report. The authors express concerns that the ECB views these limiting features as permanent rather than provisional.
Interests Of Intermediary Banks: A Potential Roadblock?
The duo further dissect the ECB’s overt commitment to “do no harm to banks and protect their business model.” Such intent becomes problematic when one realizes that a significant share of banks’ profits emanates from offering payment services.
This poses a question: would banks genuinely promote a digital currency that might undercut their own revenue streams?
As the report highlights:
Banks have no interest in seeing the digital euro alive and well unless digital euro-related bank services, such as onboarding or wallet management, prove to be even more profitable.
The report further brings to light another potential pitfall for the digital euro – the plan to impose a negative interest premium during financial distress periods. Such a move could understandably dampen the digital euro’s appeal to intermediaries, making its successful rollout even more challenging.
Furthermore, in a world where user experience is paramount, the digital euro’s purported “subpar” convenience could be a major drawback. The researchers opine that private-sector solutions will likely overshadow the digital euro when it comes to user-friendliness.
In addition to this, given the prevailing sentiments, many European citizens might have reservations about the ECB’s commitment to privacy and resistance to censorship.
As it stands, the digital euro project is still in its formative phase. While ECB officials have optimistically marked 2027 as the earliest possible issuance date, the road to that launch already seems fraught with questions and challenges.
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