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The European Central Bank has cautioned that if governments do not get on the digital currency bandwagon quickly, the IT industry would overtake them.
The European Central Bank (ECB) issued a strong warning today in a paper that countries who opt out of deploying central bank digital currencies (CBDCs) may face challenges to their financial systems and monetary sovereignty.
CBDCs are digital copies of fiat currencies, in the case of the European Union, a digital replica of the euro. They are comparable to stablecoins, which are tied to a certain fiat currency at a 1:1 ratio.
According to the research, “The International Role of the Euro, June 2021,” one danger of failing to implement a CBDC is the possibility of “foreign tech giants potentially offering artificial currencies in the future.”
While the story does not identify individuals, the ECB was most likely thinking about Facebook—the Diem Association, of which Facebook is the primary supporter. The group announced last month that a trial version of its digital money, a stablecoin, is on the way.
“[T]he ability of central banks to fulfill their monetary policy mandate and role as lender of last resort would be affected,” reads the report.
Pieter Cleppe, EU policy analyst at Property Rights Alliance (PRA) and formerly the Brussels head of the think tank Open Europe, said that while the ECB sees a potential threat from big tech, private banks also feel equally threatened by the ECB’s digital euro.
“A digital euro would strengthen the role of the ECB within the banking system, to the detriment of private banks,” Cleppe told Decrypt. “This means that any monetary expansion would lead to inflation much more quickly as private banks would no longer be there to prevent all that money from flowing into the real economy.”
Building a CBDC for the European Central Bank
Governments are frequently interested in establishing CBDCs because digital fiat currencies make it simpler to examine financial activities and disperse funds more cheaply during times of crisis.
“The ECB’s digital euro, like the Chinese digital yuan, is ultimately intended to track users. This contradicts the underlying essence of cryptocurrencies, which seek to free money from governmental control,” Cleppe told Decrypt.
CBDCs, unlike cryptocurrencies, are normally not intended to be on a decentralised blockchain, since the central bank would aim to maintain unambiguous authority over the ledgers. The European Central Bank has yet to decide on the underlying technology.
It polled the public on its CBDC intentions in April and discovered that half of those polled believe blockchain can deal with counterfeits and handle technological issues.
However, few countries are rushing to introduce digital versions of their currencies.
In October, the Bahamas debuted their sand dollars. In the same month, China’s digital yuan, which is still in beta and is the most advanced CBDC initiative from a large country, handled 1.1 billion yuan in transactions.
Other countries, such as the United Kingdom and Japan, are taking their time to consider the issue. According to the most recent report, the ECB is doing the same.