Euro’s Standing Could Improve With Digital Version, ECB Says

In a new report, the European Central Bank says that the advent of a digital version of the euro could improve the currency’s global standing by making it easier for people to save or make payments, especially in “third countries” with unstable currencies.

As Reuters noted on Wednesday (Jun 2), the ECB says a digital euro could boost the appeal of the euro, although the size and health of the eurozone economy must take precedence. Use of the euro has stagnated for years, and dipped last year thanks to COVID-19, a trend the European Commission has hoped to reverse by boosting the use of the currency outside of Europe.

But there are some risks here, Reuters noted, including the threat that opening a digital euro to foreigners could create a path for money laundering or lead to runs on weaker currencies in tough economic times.

The ECB said the issues could be handled through the design of the currency — for example, by putting caps on how much an individual could own. “Transparency or selective privacy would enable better compliance and know-your-customer checks to be implemented, thereby controlling illicit payment flows, for instance, for large transactions,” the ECB said. “These safeguards would strengthen the reputation and credibility of the digital euro.”

Reuters said the ECB has yet to decide whether to introduce a digital euro. ECB President Christine Legrand told Bloomberg News in March that introducing a digital euro would take at least four years, assuming it happens at all.

But the ECB’s report also noted that “risks” exist if a digital currency is not offered, especially if foreign payments providers were to dominate domestic ones. “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 report stated. “Issuing a CBDC would help to maintain the autonomy of domestic payment systems and the international use of a currency in a digital world.”

The ECB and European Commission released a statement earlier this year announcing that they were considering the launch of a digital euro, saying the two organizations were “pursuing their efforts toward ensuring a strong and vibrant European digital finance sector and a well-integrated payments sector to respond to new payment needs in Europe.”