European Central Bank to launch proposals for 'digital euro' to fend off crypto threat

The European Central Bank, on October 12, will be launching a public consultation and start experiments to help decide whether to issue digital currencies for the 19-nation currency club. The recent move would allow holders to make payments via the internet and possibly even offline. The idea of ‘digital euro’ comes as the unprecedented coronavirus pandemic has accelerated a shift away from cash, which has led to policymakers nervously eying the rise of private cryptocurrencies like Bitcoin. 

According to reports, the ‘digital euro’ would be backed by the central bank in a bid to make it ‘risk-free’ like banknotes and coins. With digital currencies, the European Central Bank will be competing with existing means of electronic payments such as digital wallets, online banks or cryptocurrencies. While the project is still at an early stage, the European officials, however, have switched into higher gear in the past year after Facebook Inc announced plans to create its own virtual token and as the pandemic boosted digital payments. 

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The ‘digital euro’ is the electronic equivalent of cash. The virtual euro would be legal tender and guaranteed by the European Central Bank. For the first time, it would allow individuals to have deposits directly with the ECB, offering a greater level of security as a central bank can never run out of the currency it issues. Additionally, like cash, money could be stored outside of the banking system, such as in a ‘digital wallet’. 

Risks of ‘digital euro’ 

So far, access to ECB money beyond physical cash has been restricted to financial institutions. Experts believe that extending it to the broader public could have major economic and financial repercussions. It is also believed that people might avoid traditional accounts in favour of going digital. However, this could weaken banks in the euro area. Further, the risk would also be higher in times of crisis, when savers might be tempted to flee to the safety of a ‘digital euro’ and trigger a run on traditional banks. 

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Concerns about privacy and making sure the ‘digital euro’ can’t be used for money laundering will also be a part of the ECB’s pros and cons list. To avoid any fraud, the European officials, however, might propose to limit the number of digital euros that each citizen could own or exchange. 

On Monday, ECB will be launching a three-month consultation and will carry out a series of experiments on the feasibility of a digital euro over the next six months. While the bank still aims to just decide around mid-2021 whether or not to launch the project, an official reportedly said that it will take between 18-months and three or four years to see the initiative come to life. 

(Image: Pixabay) 

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