Policymakers are divided on whether a digital euro is necessary for the eurozone in a world where cashless payments already exist but supporters of the central bank digital currency (CBDC) project argue that Europe needs a payments system that is locally controlled, the Financial Times reported.
Supporters also argue that the declining use of cash — which serves as an important stabilizing force for the financial system — will inevitably drive consumers to other payment options like stablecoins, cryptocurrencies, and CBDCs issued by other sovereigns.
Fabio Panetta, the ECB executive board member overseeing the digital euro project, told the newspaper that the eurozone needs its own “risk-free asset” that can compete with other payment systems and the only option is for the ECB to issue its own digital currency.
According to Panetta:
“If the sovereign doesn’t offer this, then others will take its place.”
Currently, non-European companies like Visa, Mastercard and Apple hold a major market share of digital payments in the eurozone and many lawmakers are concerned that the eurozone is overly reliant on these companies for its payment needs.
Additionally, no single payment system is universally accepted across the eurozone — a gap the digital euro intends to fill, according to the report.
Panetta said:
“Digitization of society means everyone wants to pay digitally. But there is no single digital means of payment you can use everywhere in the euro area. Visa or Mastercard are controlled by non-European companies and are widely used, but many shops do not accept them. Even cash is not accepted everywhere.”
Division among policymakers
The digital euro has received a lukewarm response from the banking sector and lawmakers opposed to the project have raised concerns over its necessity and whether its benefits are worth the risks to financial stability.
Many who are opposed argue that a digital euro payment system would be redundant as digital payments are already a reality through commercial banking. The new system will potentially add further “complexity and inefficiency” to payments, the report said.
Banking lobby group Institute of International Finance CEO Tim Adams told the Financial Times:
“Parallel payments systems could tie up capital and liquidity, the new system would likely face the same pain points, and it would be expensive.”
Banking sector worried
Meanwhile, bankers are worried that the digital euro will increase the risks of bank runs as it will give consumers a “safe haven” to move their money to during times of crisis.
The European Banking Federation raised concerns over the “significant risk” of bank runs due to the digital euro in March, which caused lawmakers to consider imposing limits on digital euro holdings to combat the issue.
Furthermore, the digital euro will be distributed mainly through commercial banks and will most likely be held in a separate app that is operated by the bank. Essentially, these digital euro deposits would be no different from traditional cash deposits at the banks in principle.
This has led to worries in the banking sector that banks themselves will have to bear the costs of the project as the ECB intends to make basic payments free for all consumers on top of making banks incharge of the deposits.
The EBF has suggested setting aside public funds to support the digital euro to ensure banks are not burdened by unnecessary costs.
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