The ECB is likely to make a decision in October 2023 on whether to continue with the project
José Manuel Tassara de León, Securities Finance expert from the Trading Room of Cecabank.
"In the pursuit of freedom, as well as honour, one can and should venture one's life; and on the other hand, captivity is the greatest evil that can befall men". This quote by Miguel de Cervantes from Don Quixote may resonate with the intentions of the European Central Bank (ECB) to start investigating the consequences of embarking on such an enterprise as the creation of digital public money. It might seem strange to begin talking about the digital euro with a quote from Don Quixote, but understanding the transformation it could bring to the monetary system, one needs to be epic in order to successfully implement it given the difficulties involved. People often make the mistake of thinking that the digital euro is a tool designed for banks, when in fact it is a defensive move by the ECB to prepare for what may happen in the future. It does not seek to improve the current processes which, for now, are robust and solid.
Based on the technological changes being developed thanks to the new DLT (Distributed Logging Technologies) and blockchain technologies, there is a real risk of disruption in the traditional financial market. We are undergoing a process of a certain degree of liberalisation of the sector. The combination of technological innovation, liberalisation and the introduction of free competition can create risks for monetary sovereignty and financial stability in the eurozone.
Ever since the ECB announced that it was beginning to explore this possibility, there has been much speculation about its ultimate design. The reality is that nothing has been decided yet and a decision on whether to continue with the project is likely to be taken in October 2023. The ECB must be prepared to tackle the emergence of private solutions such as stablecoins and competition from other CBDC (Central Bank Digital Currencies). These alternatives challenge the control of the money supply and interest rates as transmitters of monetary policy.
Defending the sovereignty of payment methods is another important issue. It is no secret that the European Central Bank sees payment systems as a public good to be protected as they are key to the financial system, and it is true that there is an excessive dependence on non-European solutions.
One of the keys to understanding the objectives behind the digital euro lies in the distinction between commercial money and central bank money. Commercial money could be understood as meaning money created by banks. By contrast, central bank money is money issued and backed directly by a central bank and should be a "risk-free asset". Our most direct relationship with the ECB is the physical banknote, which is essential for financial stability within the eurozone.
Issuing a digital euro is not intended to replace cash, but to complement it. The ECB is aware that, with developments in payment methods and the reduced use of cash, there is a risk of losing direct contact with the retailer. This is the direct delivery of central bank money to continue to serve as an anchor of financial stability.
There are important issues such as innovation and the development of efficient payment methods, both in terms of time and cost. The digital euro seems likely to generate them, but do we need yet another tool if the Eurosystem has developed instant transfers? This is an interesting debate as instant transfers are more in vogue than ever.
Bizum, with a market share of close to 60% in Spain, has shown that a reduction in costs and time helps to improve the efficiency of payment systems. Could instant payments be the obstacle for CBDC? If we understand these only as a means of payment, it is clear that they are, but the characteristics of the digital euro go beyond that, from defensive response, to off-line use, to the use of smart contracts and its interoperability with DLT platforms. These characteristics are difficult to replicate in instant payments.
Banking could be affected by uncertainties in its status quo, which will only become clearer with the final design. Financial institutions risk being affected if private liquidity is partially diverted towards ECB money. The outflow of cash could lead to part of deposit funding having to be shifted to the capital market, which would make the latter more expensive.
There are many unknowns that remain unanswered. How will it be designed? Who will distribute it? Who can program it? Be that as it may, only time will tell whether what Don Quixote saw were giants or windmills.
