Benefits and risks of the Digital Euro

In a recent speech during the 2021 Annual Convention of the Financial Markets Association, Pablo Hernández de Cos, Governor of the Bank of Spain, outlined the main challenges and opportunities arising from the potential issuance of a Digital Euro, decision that will be taken only after an exhaustive analysis of the benefits and risks that it may pose.

Potential benefits of issuing a Digital Euro:

• Promotion of competition and counterbalance to some trends emerging from the digitization of financial services. The supply of new private digital currencies favors the decentralization of the traditional value chain, and can accelerate, without control, the creation of money and credit flow to the economy. In addition, they could favor situations of market dominance or excessive fragmentation, damaging both financial stability and users. According to the Governor, “on the path of digitization of the financial system, the issuance of a Digital Euro would allow, in short, to preserve the consumer protection mechanisms, the safeguarding of privacy, the prevention of money laundering or the promotion of competition”.
  
  
• Integrating factor at European level, both for the payment circuit and other technological developments, such as electronic identity. In this sense, it would be also a dynamizing factor for digitization, enabling business possibilities that have not yet existed.

Potential risks of issuing a Digital Euro:

• Unintended relevant distortions in the financial system performance. It may impact financial intermediation, replacing the means of payment that the financial sector now provides, or even the deposits that banks now safeguard, especially in crisis times, in which there would be more appetite to maintain deposits in the central bank. In the event, that the Digital Euro was accessible to non-residents and interoperable with the payment systems of other currencies, the above negative effects for financial stability could spread internationally at great speed and alter the international role of different currencies.
  
  
• To mitigate that risks, the design of the Digital Euro could establish, for example, an indirect distribution through supervised financial intermediaries, limits to the balances held in Digital Euros and/or penalties to their remuneration above a certain threshold.