After prolonged contention over the direction of the digital euro, European finance officials may have reached a compromise on the strategy for the central bank digital currency (CBDC).
The European Central Bank (ECB) has positioned the digital euro as a much-needed counterweight to the dominance of both Visa and Mastercard’s card networks and dollar-backed stablecoins. In addition to payments competition, the ECB argues that a digital euro could strengthen the region’s independence in critical sectors such as finance, energy, and defense.
Despite these potential benefits, bringing a digital euro to fruition has been a difficult road. A major obstacle has been disagreement among EU nations over how the digital euro should be issued and how many of it each resident would be allowed to hold. The latter is especially sensitive, as governments fear that unlimited CBDC holdings could trigger destabilizing bank runs.
Now, however, there appears to be light at the end of the tunnel. EU finance ministers have agreed that domestic officials will be able to weigh in on the issuance of the CBDC in their countries and will retain the power to set limits on individual holdings.
Lingering Objections
While this is a substantial step forward for the digital euro, several objections to the CBDC remain. The ECB would be able to track ownership of digital euros, potentially bolstering defenses against fraud and money laundering.
However, many governments are concerned that this capability could also give the ECB a channel to surveil their nation’s citizens. Further doubts have been raised about the ECB’s ability to keep the digital euro secure, particularly after an outage at the central bank earlier this year disrupted transactions involving trillions of euros.
A Political Statement
One of the overriding challenges facing the digital euro is that many lawmakers see little need that would justify the cost of issuing it. This is one of the reasons why many other countries have scrapped plans for a CBDC.
Most notably, the Bank of England has paused its work on a digital pound, partly because officials didn’t identify a compelling case for introducing it. By contrast, the EU views the digital euro as more than just a tool for payments.
“The digital Europe is not just a means of payment, it is also a political statement concerning the sovereignty of Europe and its capacity to handle payment, including on a cross-border basis, with a European infrastructure and solution,” said Christine Lagarde, President of the ECB said during a press conference.
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