A Digital Euro: The devil is in the detail

Speech by Fabio Panetta, Member of the Executive Board of the European Central Bank (ECB), in which he analyzes the main reasons that have led the European Central Bank to work on the adoption of a digital euro and the unintended consequences that it could have on banking intermediation, financial stability and the international financial system “if it is not properly designed”.

According to him the main reason to support the issuance of a “digital euro” should be “to combine the safety of central bank money and the convenience of a digital means of payment in order to satisfy consumer preferences”. In relation to digital payments and the entry of non-financial competitors, such as the Big Techs, he affirms that “although digitization generates greater efficiency and lower costs, it can also pose risks for consumers and the financial sector”, paying special attention to the following questions: 

• Misuse of personal information and lack of privacy in financial payments.
• Implementation of the “winner-takes-all model” encouraged by the big platforms could reduce competition in financial markets, limiting consumer choice.
• Digital and monetary Sovereignty: Dependence of technologies governed elsewhere could create systemic risks and even endanger monetary and digital sovereignty.

He also describes some potential unintended consequences that need to be addressed and carefully considered before issuing a “Digital euro”:

• In normal times it could create a risk of commercial banks disintermediation, as the “digital euro” could attract payments and deposits activity from banks, reducing their incomes and customer information related to such activity, which could lead to lower credit grant. Fabio Panetta clarifies that the ECB does not intend to interact directly with hundreds of millions of clients, it will provide safe money, but financial intermediaries (i.e commercial banks) will continue to offer their services to clients.
• In times of crisis it could pose risks to financial stability as a “digital euro” would give access to a safe liquid asset that could accelerate “digital runs” away from commercial banks.
• Impact on the international monetary system. A very liquid digital euro may lead to foreign investors using it disproportionately, amplifying international shocks. According to him the digital euro should be designed in a way that prevents it from being used as a form of investment. For that purpose he provides some ideas such as limiting the amount of digital euro individual users can hold or penalizing remuneration on individual users’ digital euro holdings above a certain threshold.