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Digital euro - opportunities and risks

Engin Eroglu

Last October, the European Central Bank (ECB) published a "Report on a Digital Euro," marking a first step on the road to a digital euro. By summer, various alternatives and their implications will be examined. So this is the perfect time for an interim conclusion.

Bitcoin and other digital currencies have steadily gained importance in recent years. Bitcoins are 65% mined in China and are very energy-intensive. Therefore, a strong role for Bitcoin contradicts both the EU's climate protection goals and strategic autonomy.

Thus, alternatives would be desirable. In response, other central banks have begun to set up digital currencies and thus counteract the development of private digital currencies. It is still to be seen to what extent this is promising - after all, state neutrality is a central point for the success of Bitcoin.

The ECB seems to be aiming for the digital euro to function as central bank money. It, thus, gives citizens access to a very secure digital currency. This design would have the potential to change the geometry of the European banking system.

In order to function in practice, the design of a digital euro must rule out the possibility of serious shifts of funds from bank deposits to the digital euro in the short term. In this way, the credit financing of companies and private individuals via banks can be maintained. Therefore, the digital euro must not increase the risk of bank runs in the event of a crisis. Otherwise, its introduction could lead to significantly higher risks for financial stability - with corresponding negative effects on the economy as a whole.

Essential for the trust in the ECB and its actions, is that cash is preserved and does not incur costs through fees, negative interest rates or other mechanisms. Cash protects privacy, works without electricity when in doubt, and is a comprehensible means of payment even for less savvy users.

However, digital currencies could open up completely new possibilities in the future, such as SmartContracts (automated payment initiation and verification) or so-called micropayments. Moreover, if properly designed, the digital euro can be linked to the efforts of a European Payments Initiative (EPI).

In this respect, it is right that the ECB does not close its mind to the issue.

Engin Eroglu
Freie Wähler MEP