Digital Euro, the ECB Is on the Move
European Central Bank (ECB) President Christine Lagarde said at the Digital Euro Conference held by the European Central Bank and the European Commission on November 7 that the issuance of digital euro will promote the expansion of payment innovation throughout the euro area, thereby strengthening Europe’s strategic autonomy. In fact, the European Central Bank launched a digital euro project as early as July 2021, which planned to launch a two-year related investigation and study. Lagarde said that the euro zone is at a relatively leading stage in researching central bank digital currencies, and the current focus is on the specific design of the digital euro and its reasonable embedding in the legal framework. The digital euro belongs to the category of digital currency, but it is significantly different from many existing digital currencies. In fact, the digital euro is essentially an extension of euro banknotes, issued by the ECB, with the main purpose of replacing some M0 currencies (In simple terms, M0 refers to cash in circulation, such as paper banknotes and coins). The difference between it and Bitcoin is that the credit risk of the digital euro originates from the European Central Bank, and the fluctuation in value is very small, unless there is a serious crisis in ECB. Such possibility is very low.
However, the credit of Bitcoin will not be guaranteed by any central bank and its value is mostly determined by the supply and demand of the market. Therefore, quite a few people take advantage of the huge fluctuations in the value of Bitcoin to speculate. In addition, the digital euro is different from the balance in PayPal account or Apple Pay account, because they are respectively guaranteed by the credit of PayPal and Apple, whose risk are higher than that of the digital euro.
A report titled “Prospects, Risks and Countermeasures of Central Bank Digital Currency Cross-Border Payments” by the Research Institute of the People’s Bank of China pointed out: “It is inevitable for global currencies to move towards the digital age.” The issuance of the digital euro is conducive to reducing the cost of banknote management, including the cost of material procurement, transportation, management and loss of banknotes. Another important use of the digital euro is that it can enable ECB to control the flow of currency to a greater extent, quickly grasp the financial market situation and formulate relevant monetary policies in a timely manner based on complete and comprehensive data, as well as prevent and monitor various an economic crime. Besides, digital currency has advantage in promoting the flow of money to areas such as medical care, education, and public welfare, because the financial department can monitor the flow of money based on the information provided by digital currency to ensure that money flows to planned areas.
It has to be admitted that although the digital euro has more advantages than the paper euro, it still faces considerable challenges. Martin Arnold, director of the Frankfurt bureau of Financial Time, raised a question in an interview: “Since the European Central Bank is a public sector and does not involve commercial interests, will it investigate the use of users’ funds in the name of the government?” This reflects people’s concerns about the protection of personal privacy while using the digital euro. In addition, even thefts of Bitcoin due to hacker attacks still occurs from time to time, so the security of the digital euro will become another major challenge to the ECB. But in any case, the digitalization of currency is the trend of the future world. “We are still in a transition period, but in another 20 years, digital payment tools will be available to everyone,” predicts Fabio Panetta, executive director of ECB.
By Tao Cheng
