A paper published by the European Central Bank (ECB) discussed various conditions for the successful implementation of a central bank digital currency (CBDC), such as the Eurozone’s own digital euro. The author also pointed out the different risks posed by such projects, such as the danger of crowding out the private sector.

European Central Bank: Digital Euro should be widely used for payment rather than investment

In order to create a successful Central Business DistrictAccording to documents issued by the European Central Bank, monetary authorities need to establish digital currency as a wide range of payment and exchange methods, and have sufficient value storage functions.At the same time, the central bank needs to ensure that currencies such as Digital euro Don’t become an important investment tool, crowd out private payment solutions, or undermine the intermediary role of the banking industry.

The document was released this week and was written by three senior ECB officials-Fabio Panetta, Ulrich Bindersel and Ignacio Troll. They listed the key success factors of CBDC and provided expert advice on how to avoid the risks associated with digital versions of fiat currencies that are currently being explored or developed in dozens of countries, including major economies.

This article has identified three conditions for the successful implementation of CBDC. The first is “merchant acceptance”, which must be broad, which means that users should be able to make digital payments anywhere. Unlike paper money, digital currencies may charge fees for each transaction and require special equipment to process payments. Although both forms of currency have legal tender status, there are other differences. The European Central Bank explained in detail:

Cash is impractical in e-commerce, and making CBDC a legal tender may require exceptions because merchants do not have the equipment needed to accept non-cash payments.

The second success factor is defined as “effective distribution.”ECB officials cited Euro system The report stated that the digital euro should be distributed by regulated intermediaries (such as banks and regulated payment providers). In order to encourage the issuance of digital currencies by the central bank, incentives may be paid to regulated intermediaries. The document divides intermediary services into two categories: onboarding and financing services—including the operations required to open, manage, and close CBDC accounts—and payment services.

The paper emphasized that “consumer needs” is the third condition for success, which refers to the ability to use CBDC to “pay anywhere, securely, and privately.” European Central Bank Executive Committee member Fabio Panetta and his colleagues believe that the option of using digital euros in peer-to-peer (P2P) payments that cannot be achieved with existing private solutions may inspire eurozone residents. They said that privacy may be another driving factor, noting that central banks can use privacy-enhancing technologies while still complying with anti-money laundering regulations. Although opposed to the digital euro in particular in this regard, the three experts insisted that:

As a public and independent institution, the central bank has no interest in monetizing users’ payment data. They will only process such data when they perform their functions and fully comply with public interest goals and legislation.

The paper proposes measures to prevent CBDC risks

The ECB document also discussed some of the risks associated with central bank digital currencies, such as excessive holding of CBDC. It proposes a series of measures to prevent permanent or temporary excessive inflow of funds into central bank digital currencies, including the introduction of limited convertibility to end the possibility of bank deposits flowing into CBDC. Setting an upper limit on the number of CBDCs that each person can hold may become another obstacle.

The document’s concern is that the issuance of CBDC may trigger a process of bank disintermediation and crowd out payment solutions currently provided by the private sector. In order to avoid this negative impact, it is important to find an adequate range of functions. It cannot be too broad to squeeze out private sector solutions, nor too narrow to restrict the use of central bank digital currencies. The representative of the European Central Bank warned that this could be a challenge for the financial sector.

The authors of the paper concluded that although CBDC has obvious advantages and central banks need to follow payment and technology trends in order to continue to perform their tasks of serving citizens and businesses, they still need to solve many design issues. A currency like the digital euro. They emphasized that in addition to the scope of functions, appropriate business models and controls are needed to meet demand and ensure the robust use of CBDC.

Do you think the European Central Bank will successfully issue a digital euro? Share your thoughts on this topic in the comments section below.

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