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In recent years, the pace of innovation and change in the financial and payments sector has been exponential. We can now make payments, transfer money, and invest by using tools that didn’t even exist a few years ago. And between 2019 and 2022, the share of euro area mobile payments more than tripled in both number and value.
These new technologies can benefit both consumers and companies, enabling greater access to financial services, offering more choices and increasing the efficiency of operations. But they also raise important questions about how to regulate them to safeguard our financial stability and protect consumers.
We have seen the emergence of cryptocurrencies from private actors and the concept of Central Bank Digital Currencies (CBDCs) take hold globally. In this context, we need to consider how best to ensure our common currency — the euro — can keep pace with these developments and continue to meet the needs of our citizens and businesses. Hence, the possibility of the digital euro.
For many observers, the central question is: What makes a digital euro any different, or better, than the many innovative digital solutions already available? And the answer to this lies in “central bank money” — or “fiat currency.”
The term “fiat currency” is used to refer to deposits held at central banks and cash brought into circulation by central banks, which only central banks can create. Customer deposits held at commercial banks aren’t considered central bank money, nor are existing forms of digital payments. What European Central Bank (ECB) monetary policy does instead is maintain price stability and keep the value of our common currency stable, so that citizens have a social contract “guarantee” that they will retain their purchasing power.
This differs from cryptocurrencies and stablecoins. Their stability and reliability ultimately depends on the issuing entity, and on the credibility and enforceability of their pledge to maintain value over time — when there’s no identifiable entity liable, claims cannot be enforced.
So, at the heart of the digital euro project is the objective to maintain the link between citizens and central bank money. For as a CBDC, the digital euro would be central bank money, convertible, one-to-one, with euro banknotes.
This conversation around a digital euro, which began in earnest when the ECB launched its investigation in 2021, has quickly moved from being a possibility to a probability. And while a final decision on whether to launch won’t be made for several years, it’s increasingly looking like a case of not if but when...
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