Digital currencies issued by central banks in European Union Member States may act as a counterweight to potentially dangerous “artificial currencies.”
Digital Currencies Are Coming to the EU
A report published by the European Central Bank (ECB) on Wednesday issued a warning to European Union Member States that falling behind on developing a digital currency may have serious implications for their economies. The assets, which are known as central bank digital currencies or CBDCs, have been floated as a concept over the past months, but while the ECB has not acted too sternly on digitalizing the EU’s currency, it may be quickening its pace now.
A digital euro is already in the works, and the way CBDCs run is similar to what stablecoins do. That is, they peg the value of each digital unit to the day trading course of the currency they represent, or in this case, the euro. Stablecoins have been around for a while now, with USD Tether attached to the US dollar and a digital yuan in China making strides towards mass adoption amid a governmental crackdown on Bitcoin. However, not many governments have jumped at the opportunity.
In exploring the reasons behind this Luddism – or pragmatism – the report titled “The International Role of the Euro, June 2021” explained that sovereign states were wary of surrendering too much control over their financial systems to foreign tech giants, for one. The report stipulated that failure to move with the times would leave a country’s financial system at a disadvantage and even bring around financial instability, precisely because of the proliferation of dominant tech companies.”
“One concern could be a situation in which domestic and cross-border payments are dominated by non-domestic providers, including foreign tech giants potentially offering artificial currencies in the future,” the report noted.
Draw Me a Digital Euro
The digitalization of money has often been a controversial topic. While some libertarian-minded individuals have objected to the absolute control, a digital financial system would have over their finances, others have welcomed the move as a safeguard against financial fraud that ultimately deprives the public purse of funds.
There is another snag. The idea of a stablecoin, or in this case a CBDC, is counter-intuitive to what a cryptocurrency stands for. Bitcoin and Ethereum are transacted through and with the help of a peer network, but central bank digital currencies enforce control, although many would agree it has to do with transparency.
Slowing Down or Picking Up
Interestingly, though, the United States has recently objected to a digital yuan and argued that it would not need to replicate a digital currency on an expedited schedule to underpin the US dollar’s hegemony. In fact, US regulators argued that the digital yuan lacked privacy. On the other hand, China has touted the e-yuan as a fully anonymous currency and explained that the lack of anonymity suggested by skeptics had to do with blockchain on a technical level, something that average consumers did not grasp in the first place.
China has recently cracked down on Bitcoin mining in the country, leading to a 16% drop in the Bitcoin mining difficulty, meaning that many miners in the country have decided to discontinue their operations. Not only that, but the government of Inner Mongolia, a Chinese province, has already decided to deck from the social credit rating of any individual or individuals who are caught facilitating or participating in Bitcoin mining.
ECB’s report cautions that creating a single payment system of CBDCs would require a level of global cooperation that should be easier to cooperate. Despite the warning, there are few governments in the European Union or globally that are actively looking to replace their paper money with digital denominations just yet.