- The European Central Bank (ECB) is planning to launch a digital euro: a central bank digital currency that would complement coins and banknotes as a payment method.
- A study commissioned by the European Banking Federation (EBF) highlights three areas that need special focus when the digital euro is developed:
– Effects on financial stability
– Costs
– Impact on electronic payments business
- Finance Finland fails to see what additional value the digital euro would bring to the already functional and efficient monetary system.
- In Finance Finland’s opinion, the digital euro still involves too many unanswered questions and actual risks.
The European Central Bank (ECB) is planning to launch a digital euro: a central bank digital currency that would complement coins and banknotes as a payment method. For the average consumer, the digital euro would not make much of a difference compared to the existing array of payment methods. The study was commissioned by the EBF and conducted by Copenhagen Economics.
A study recently commissioned by the European Banking Federation (EBF) found three areas that the digital euro might impact in a significant way. The first of these is financial stability, i.e. the ability of the overall financial system to weather shocks and provide critical financial services, also in periods of stress.
The digital euro proposals have floated the idea that individual citizens could only hold a limited amount of the currency. Different-sized limits have been tossed around, one of the examples being €3,000, which is approximately the value of euro banknotes currently in circulation divided by the population of the eurozone. According to the EBF, a large-scale conversion of deposits to digital euros could trigger a bank run of over €700 billion.
“This kind of a sharp decrease in banks’ assets would inevitably affect financial stability. Deposits are a vital and inexpensive source of funding especially to smaller banks, and a run on deposits would directly affect the availability of lending”, points out Finance Finland’s CEO Arno Ahosniemi.
Costs without benefits
The EBF also draws attention to the costs that banks will incur from a project of this size, and that this may weaken their competitiveness. When assessing the costs of the digital euro, the EBF has compared the project with previous large-scale payment reforms such as SEPA instant payments.
Over the years, banks have invested considerable sums into building a system that ensures the secure transfer of payments and enables the prevention of fraud and money laundering. Against this backdrop, the EBF asks whether the plan is to build the digital euro on top of the existing solutions of commercial banks or to create an entirely new one.
“Either way, the costs of the new system would be immense for both society and commercial banks. The benefits of the digital euro are yet unproven, but there’s no doubt that it will generate costs. The pressing question is who will foot the bill”, Ahosniemi says.
In the proposal, the basic digital euro services would be free for consumers, but the distribution of the new digital currency would be obligatory for banks, which would mean additional costs. The distributors’ only source of income would be a possibly regulated cut of transaction-based merchant fees. The proposed business model is not sustainable.
A new layer to electronic payments
The digital euro has been designed to both support and complement the current payment system. Finance Finland continues to stress that the digital euro would not bring any additional value to the already functional and efficient monetary system. The EBF also notes with concern that the digital euro, which would be maintained with public funds, would crowd out existing payment methods.
Although Finland is almost fully digitalised in payments, the rest of the EU is lagging behind in this progress.
“The ECB’s objective of promoting the sovereignty of European payments is understandable, but person-to-person payments, purchases in physical stores and online shopping are already managed in an efficient and market-driven way”, Ahosniemi points out.
Some fundamental questions about the establishment of the digital euro remain open, and these are questions that will have extensive effects on the business model, financing structure, payment systems and intermediation activities of banks.
“Before any final decisions about the future of the digital euro are made, the pros and cons of the project should be weighed carefully”, Ahosniemi concludes.
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