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Digital Euro: the good, the bad and the uncertain

Opiniao Tiago Goncalves Interior

The ECB's public consultation on a digital euro, published in April 2021, confirmed that privacy was considered the most important feature by both citizens and professionals.


In 2021, the ECB began analyzing the digital euro, a bold move that could open up new opportunities in Europe. Although the issuance of central bank digital currencies (CBDCs) remains largely hypothetical, over 90% of these banks are evaluating this decision. Therefore, it is important to understand its benefits, risks, and uncertainties.


In terms of its advantages, the digital euro will play a role in safeguarding European sovereignty – in digital, monetary, and economic terms. It will ensure autonomy over financial flows, making Europe independent of private actors outside the EU and strategically independent of other anchor currencies in the international system. This digital euro will reduce transaction costs and promote economic digitization while ensuring that the ECB's money remains at the center of the financial system, providing stability. A digital euro can potentially catalyze our currency on a global scale and generate much-needed efficiency benefits in cross-border payments, providing interoperability with other international digital currencies. Additionally, it will make the current financial system safer, more accessible, and simpler to use, promoting financial inclusion.


This digital euro also powers innovation, with benefits for the European economy. Payment is a crucial service for the entire economy, and an effective solution can increase business efficiency, create new business models, and fuel economic growth. With the inclusion of programmable payments, the benefits of this can change the world of business and further promote the economy of things, promoting a more digital future. Commercial banks will be responsible for distributing it – as they do with physical euro today. The payment ecosystem is enormous, and with the complementary launch of a digital euro, there is potential to develop new business models. Commercial banks can be an integral part of these new business models and expand their offerings and services.


However, its main strengths – security and liquidity – can affect monetary and financial stability on three fronts, if not adequately designed. The most important is perhaps consumer unpredictability. If the next financial crisis looms, and account holders massively convert their assets in commercial banks into risk-free digital euros, the risks to banks will be much greater than with a physical bank managed in ATMs and branches. Commercial banks can fail earlier. Second, central banks are not immune to cyber attacks. In a two-tier CBDC, criminals or hostile nations could disrupt the digital currency by targeting a central bank issuing it or commercial banks distributing it.


Finally, there is the issue of acceptance – even if the digital euro were available to everyone, would they use it? On the one hand, many people do not understand what the digital euro is and therefore cannot see the benefits. On the other hand, people fear they may lose privacy. The ECB's public consultation on a digital euro, published in April 2021, confirmed that privacy was considered the most important feature by both citizens and professionals.

Mitigating measures will be weighed for all uncertainties and risks. Central banks face the challenge of realizing the benefits of digital currencies without compromising the banking and financial system. The ECB is aware of this balancing act, as evidenced by the fact that until October 2023, the time for the investigation phase is running out. A decision on the final design and execution plan is expected then.


What seems increasingly certain is that the digital euro is likely to be implemented.


Article published in Jornal Económico.

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