Europe should conduct research and be prepared for a digital euro, but the European Central Bank (ECB) shouldn’t launch the digital currency, a new report has recommended.
Aptly titled “Digital Euro: When in doubt, abstain (but be prepared),” the report was compiled by economist Ignazio Angeloni for the European Parliament. It looked at the need for the central bank digital currency (CBDC), its effects on the banking industry, and its risks and benefits.
Angeloni, an economics professor at the European University Institute, prepared the report at the request of the European Parliament’s Committee on Economic and Monetary Affairs.
By launching the digital euro, ECB would start offering retail services, directly competing with commercial banks. To avoid bank disintermediation, ECB must design a comprehensive compensation structure for the banks. So far, the central bank’s reports have given no information on this, Angeloni says.
“Achieving this middle ground is difficult, and the schemes envisaged by the ECB (maximum balances, flexible remuneration) offer no guarantee in this respect,” he said.
The report further claims that a digital euro could accelerate a bank run. By offering easy access to a riskless alternative to bank deposits, the CBDC would allow customers to ditch their banks. ECB’s solution has been a proposed balance cap of 3,000 euros, but the report says this might not be sufficient in all circumstances.
“This risk is compounded by the incompleteness of the banking union, specifically the lack of euro-wide deposit insurance.,” it adds.
Then there is the privacy concern: Surveys have revealed that it’s the leading concern for Europeans, many of whom worry the CBDC could be a tool for financial surveillance. ECB’s proposed solutions include allowing no KYC (know your customer) for low-value transactions and giving commercial banks sole access to user data.
While he attacked the digital euro for most of the paper, Angeloni noted that it may improve cross-border funds transfers. For this, he urged the ECB to consider a limited and targeted version of the CBDC.
“All arguments considered, this author’s opinion is that the ECB should continue its exploration, including a testing phase, but in the end not launch a PDE unless new elements emerge strongly supporting such a decision,” the author concluded.
To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.
Watch: Blockchain provides perfect foundation for CBDC
New to Bitcoin? Check out CoinGeek’s Bitcoin for Beginners section, the ultimate resource guide to learn more about Bitcoin—as originally envisioned by Satoshi Nakamoto—and blockchain.