Ongoing talk around a new digital euro is still in the early stages, with the ECB in stages of exploration, testing, and preparation. The Eurosystem High-Level Task Force is in the process of exploring technical and regulatory aspects of a digital euro, in cooperation with the European Commission and the European data protection authorities. These early stages of development mean that Europe is unlikely to see a Digital Euro before 2027 at the earliest.
Still, with significant resources dedicated to the project, the ECB is seriously pursuing the digital euro. For banks and financial organisations, that presents new risks and concerns, which must be considered and planned before, well before a finalised product is developed or released. Currently, the ECB’s investigation phase for the digital euro project is intended to end in July 2023, giving most organisations plenty of time to consider new risks and opportunities.
What is it?
The Digital Euro is the concept of a fully digital currency, based on digital wallets. This is part of a near-global spur of research into central bank digital currency (CBDC), with China proposing a digital Yuan as early as 2014. The ECB’s version is intended to complement rather than replace the existing Euro. It also entails significant shifts in how money is issued:
- A payment system to centralise where money is issued
- The possibility for end users to open their own digital wallet
Pros and Cons of the Digital Euro
The digital euro has several pros and cons for banks and consumers.
- Reduced risk for consumers. If Digital Euro is backed by the ECB, consumers would be safe in case of bank failures. The ECB is very stable and therefore a safe place to keep money. Consumers would no longer have to rely on deposit guarantee schemes.
- A stable payment system.
- A universal payment method for everyone within the EU.
- The ECB could directly provide funding to governments, without taking on the debt of a bond.
- Many European cultures remain cash centric.
- The ECB may be overstressing rapid testing of the digital euro because of the pace of cryptocurrency and pressure to compete with it.
- Financial organisations have no real experience with digital currencies, necessitating the setup of new systems.
- Those new systems will generate new and poorly understood risks which could have long-term impacts on the financial stability of the European economy.
- The digital euro shifts focus away from banks individually improving payment services and instead shifts to a centralised approach
The Digital Euro Introduces New Risks for Banks
The ECB’s March 30th speech suggests that they are looking into a central payment app, based on focus group tests – this could prove steep competition to banking products like payment apps and even cards. Accessing a centralised bank account with direct access to money issued by the ECB also creates questions on how that will change the consumer’s interaction with private banks. Of course, it’s highly unlikely that consumers would give up private banking altogether, but many may prefer to shift the large part of savings to the ECB directly, where it’s most safe.
Therefore, a digital euro could pose new risks in the form of reduced funding for banks, reduced cashflow, and decreased demand for products and services.
That same reduction in funding could create new challenges for banks to maintain their client relationships – whether through the form of services or products like digital wallets.
At the same time, the digital euro also presents plenty of prospective opportunities. For example, digital wallets. The digital euro will also be interoperable between banks, which means improved payments, payment logging, and better security and safety. These shifts create opportunities as well as new spaces for competitors, but we don’t fully know how much.
The digital euro is coming, and it will be a unifying force in creating digital economies in Europe. At the same time, many factors are still unclear. We don’t know what the digital Euro will look like in 5 years, what risks will present themselves, or even how banks will have to handle changes.
If you’d like to have a discussion with us, we’d be happy to look at risk and opportunity, and see how we can help you, now, or in the future.Back to The Digital Euro: Opportunity or Threat