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The global race to create a central bank digital currency has been heating up after China’s latest plan of creating its version of a “crypto-yuan”. The European Union has been catching up fast, with some members of the banking community whispering about their openness to a digital euro. As Christine Lagarde takes the helm at the European Central Bank (ECB), potential changes could bring a new impact to not just the financial world, but the crypto space too. Can we expect a digital euro in Lagarde’s era? What does that mean for the broader crypto market?
Door to Digital
Central bank digital currency or CBDC is the latest hype among central bankers. With China to become the first major economy to digitalize its currency, although the timeline remains largely unknown, more details of the project are being . At the same time, China’s ambitions in blockchain seem like a wakeup call for many central bankers to rethink the notion of digitalizing currency, and the opportunities it can bring. The European Central Bank could be the next major policy-setting body to make a move.
In November 2019, Christine Lagarde was appointed by the European Council as the new president of the ECB. Lagarde is expected to deliver a major shakeup to the central bank. Financial Times that the reform plans range from holding regular votes on monetary policy to requiring that the president does not pre-announce policy plans. Nevertheless, these proposals could potentially bring widespread changes in terms of market interpretation of future policy meetings. With a new leader in place, it could also open the door for some deeper makeovers and blockchain technology could be one of them.
Lagarde is one of the few key monetary policymakers who is open to digital currency. In early September, when Lagarde testified before the European Parliament Economic and Monetary Affairs Committee, she ,
“Central banks and supervisors need to ensure the safety of the financial sector, but also to be open to the opportunities provided by change. In the case of new technologies, including digital currencies.”
Although the hearing was part of the candidate selection process, her positive stance on crypto highlights the possibility of having a more blockchain-friendly environment in Europe under a Lagarde-led ECB.
Digital Euro: A Threat to King Dollar?
Although we are still extremely far away from a fully digitalized euro, yet, a blockchain-backed euro could threaten the leading reserve currency status of the dollar.
Spanish economist Daniel Lacalle a study about why a “crypto-yuan” won’t threaten the dollar. He believes that China’s tough capital control system and its lack of transparency in its financial system won’t be able to disrupt the global monetary system.
However, the euro would be another story here. Data from the IMF that the euro remains the second largest global reserve currency in 2Q19. That’s just behind the dollar and before the yuan, and it makes up more than 20% of the global reserve currency, with the dollar at 61% and the yuan at 1.97%. The euro is widely proven as a stable, transparent and commonly used currency, and unlike the yuan, it doesn’t have any capital control in the system. Therefore, a “crypto-euro” could make a profound and intense impact on the financial system.
The fact that the Bank of England governor Mark Carney has been vocal on having a new digital currency and believes that a new digital currency backed by a large group of nations would unlock dollar funds that governments currently accumulate as an insurance policy in uncertain times.
In the last Jackson Hole conference, Carney said,
“The dollar’s influence on global financial conditions could similarly decline if a financial architecture developed around the new [digital currency] and it displaced the dollar’s dominance in credit markets. By reducing the influence of the US on the global financial cycle, this would help reduce the volatility of capital flows to emerging market economies.”
On top of that, the Association of German Banks, which represents 200 banks in the country including Deutsche Bank, Credit Suisse, and Commerzbank, has been for a programmable digital euro and a common pan-European payments platform. The group believes that the EU should catch up with its global peers and other technology companies, signaling China and Facebook, to stay competitive in the game of blockchain.
The European economy has been struggling under the global trade tensions, although Germany has marginally avoided a technical recession in the third quarter. Economic development in the region is still fragile and the EURUSD has given up 3.8% of its value so far this year. It’s interesting to see what the new ECB leadership will do to stimulate the long-term growth of the region and strengthen the euro’s status as a global currency. Creating a digital currency is likely to be one of the cards.
Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involve significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.
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