Last October, the European Central Bank (ECB) announced that it was concluding the research phase of the Digital Europroject and moving on to its implementation. However, the questions of what impact the introduction of central bank digital currency (CBDC) will have on the financial market and whether it will benefit consumers still need to be answered.
According to Elena Leontieva, President of the Lithuanian Free Market Institute (LFMI), the detailed analysis of the digital euro project proposed by the European Commission (EC) was prompted by the realization that a healthy economy requires healthy money.
“Since the establishment of the Institute, we have been striving to build the foundations of a stable financial system, initiated the introduction of the Law on the Credibility of the Litas, and contributed to the formation of the stock exchange system and the mechanism of the country’s banking system. The initiative of the Central Bank to issue a digital euro could not have escaped our attention,” said Ms. Leontjeva at the opening of the expert discussion organized by the Institute.
Under the EC proposal, the central bank, rather than commercial banks, would assume liability for a new digital payment instrument in the euro area. According to Evaldas Ruzgis, Director of the Market Infrastructure Department of the Bank of Lithuania, the project aims to create a digital alternative to cash. Therefore, the CBDC is trying to replicate the characteristics of the physicaleuro. According to him, the need for such an instrument stems from three main reasons.
The first is that cash allows consumers to opt out of the commercial banking system, and with the spread of e-commerce, Europeans would not be able to take full advantage of this feature of the cash. According to Mr Ruzgis, the second reason is Europe’s quest for strategic independence. Currently, most payments are made using the US VISA and Mastercard systems. “If something were to happen, the European payment system would become dependent. The ECB’s strategy clarifies that dependence on existing payment schemes is not satisfactory,” the LB expert stressed.
Moreover, the digital euro could become a standard payment instrument across Europe. Private business initiatives and the Single Euro Payments Area (SEPA) created since 2017 have yet to ensure this, he said. “If these problems did not exist, there would be many more questions about why a tool like the digital euro is worth implementing,” Ruzgys stressed.
Leonardas Marcinkevičius, an LFMI expert who participated in the discussion, doubted whether the digital euro could become an equivalent substitute for cash. According to him, the quality of money consists of three essential functions: medium of exchange, unit of accounting, and store of value. However, the characteristics of the digital euro, as set out in the EC regulation, would not allow it to fully fulfill these functions.
“It is envisaged that the digital euro would have a savings limit or expiry date. From the consumer’s point of view, this would mean that the digital euro would not be equal to cash,” the expert explained. On the other hand, he said that if the digital euro is not equal to cash, additional incentives will have to be created to encourage consumers to use it. And these could distort the market.
Leonardas Marcinkevicius also pointed out that the central bank would have to constantly balance the popularity and spread of its own instrument with the stability of the euro area economy and financial system as a whole.
“On the one hand, the popularity of this instrument could pose a significant risk to the financial system’s stability. On the other hand, if all the restrictive measures that would protect against these risks were in place, the development of the digital euro would be disrupted. Suppose it is expensive for taxpayers and unpopular with consumers. In that case, it is already worth questioning whether there is a real need for it”, Mr Marcinkevičius summarised the problem that emerged during the discussion.
