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The European Central Bank has warned that a CBDC or digital euro may be required to head off the spectre of “artificial currencies” dominating cross-border payments.
In ECB’s annual review of the euro dubbed “The international role of the euro”, economists Massimo Ferrari and Arnaud Mehl conveyed concerns over the rise of artificial currencies led by unnamed “foreign tech giants” — likely a veiled reference to Facebook’s Diem project:
“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,” the pair added.
The ECB has long-held concerns over the rise of artificial currencies or stablecoins in Europe and previously asked EU lawmakers for veto powers regarding private stable projects such as Facebook’s Diem coin.
The ECB has taken a careful approach to launching a digital euro, with ECB’s president Christine Lagarde noting in January that “it’s going to take a good chunk of time to make sure it’s safe,” and adding, “I would hope that it's no more than five years.”
Ferrari and Mehl’s report on “CBDC’s and global currencies ” weighed up “several scenarios in which the need to issue a digital euro” may become important.
The economists emphasized the need to compete with big tech firms for payment products and services, and noted that bundling a digital euro with complementary services could be a way to do so:
“A CBDC could facilitate the digitalization of information exchanges in payments through e-invoices, e-receipts, e-identity, and e-signature, allowing intermediaries to offer services with higher value-added and technological content at lower cost.”
According to the report, deploying the digital euro may also be needed to enhance current cross-border payment infrastructures. The authors notes that a digital euro could negate the need to use foreign currencies for international transactions, and reduce the costs associated with doing so, which in turn would “facilitate an expansion of global e-commerce”:
“Low transaction costs and bundling effects could increase its appeal for invoicing cross-border transactions — as a means of payment and as a unit to settle current transactions.”
The report also stated that the “specific design features of a CBDC would be important for its global outreach,” and emphasized the need to incentivize the use of a digital euro through interoperability, the anonymity of users, and being able to conduct offline payments.
However, the economists stressed that anonymity would also have to be tempered with the need to have enough information on CBDC users in order to “build safeguards” and identify misuse of funds for terrorism financing, cross-border criminal activities, and money laundering.