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June 4, 2021

Rise of ‘Artificial Currencies’ Could Threaten Stability of Financial System, Says European Central Bank

By Daily Hodl Staff

Despite being years away from any launch of its own digital currency, the European Central Bank (ECB) says governments that fall behind on the digital asset craze may experience threats to their financial systems.

In a report about the international role of the euro, researchers highlight the importance of central bank digital currencies (CBDCs) versus “artificial currencies” that are being built by tech giants such as Facebook.

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“Finally, attention should be paid to the risks to stability that might arise if a central bank does not offer a digital currency. One concern could be a situation in which domestic and cross-border payments are dominated by non-domestic providers, including foreign tech giants potentially offering artificial currencies in the future.

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, and the ability of central banks to fulfil their monetary policy mandate and role as lender of last resort would be affected. 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 report suggests that a digital version of the euro bundled with complementary services may be a way to compete with big tech firms for payment products and services.

“A CBDC could facilitate the digitalization of information exchanges in payments through e-invoices, e-receipts, e-identity, and e-signature, allowing intermediaries to offer services with higher value-added and technological content at lower cost.”

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The potential digital euro could also enhance current cross-border payment infrastructures, helping global e-commerce.

“Low transaction costs and bundling effects could increase its appeal for invoicing cross-border transactions – as a means of payment and as a unit to settle current transactions.”

However, the European Central Bank is not in a rush. The ECB’s president Christine Lagarde has stated that, if indeed the digital euro gets the green light, she expects the development phase to last for years.

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Featured Image: Shutterstock/GrandeDuc