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European Central Bank Digital Currency. Is It Possible?

European Central Bank

June 25, 2020 | 

576 Views | 

JOHN K MWANIKI | 

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Ever since the advent of digital currencies, the money world has never been the same again. The prevalent technological developments are acting as the force behind the improvements. Currently, it seems like digital money is the way to go. 

As the primary money control system, central banks are evolving to embrace the new form of money. The European Central Bank is already pursuing the possibility of creating a digital currency. The only persistent concern is its possibility and the possible effects on the economy. 

Follow through to understand what the European central bank digital currency means to the users and the economy. 

The Need for the Digital Currency 

To understand the possibility of a central bank digital currency (CBDC), you must know its need. The only way a product can be effective is if it has users. 

In his keynote speech at a 2020 Consensus Virtual Conference, Yves Mersch, Vice-chair of the Supervisory of the ECB, reiterated that the introduction of the CBDC is not to keep up with trends. Instead, it is a way of staying ready to embrace the current market demands. "Not that we are keeping up with trends. We have to stay ready. Ready to embrace financial technological innovation which has the potential to transform payments and money faster, and in more disruptive ways, than ever before.” He said.

One of the reasons why the central bank would be so hard-pressed to launch the digital currency is a waning demand for the current currency, which is currently not the case. Even though the digital currency offers several benefits like faster transactions and anonymity, most consumers still trust the cash. This is evident, as more than 80% of point-of-sale transactions in Europe are carried out in cash. 

By embracing digital currency, the central bank is only preparing for a future change in demand and preference by the consumers. 

Possible Consequences of CBDC to the Financial System 

The possible main effect of the digital currency on the economy would be of lesser trust in commercial banks by consumers. Unlike the cash model, where banks are the owner, digital money is consumer-owned and controlled. Instead of trusting the banks with their money, consumers would prefer digital money wallets. 

Banks cannot offer most of their services, like loans, without a sustained deposit cycle. It means the introduction of CBDC will most likely lead to an economic crisis. 

Another concern that comes with the CBDC is its possible effects on the current money system. As of now, most retail money services are provided by commercial banks, while the central bank only offers a regulatory role. By introducing a CBDC, the central bank would have to start offering the retail services, thus pushing the commercial banks out of businesses.

Once the central bank launches the retail deposit services, it must also take on the other customer-oriented services like loan provision. Providing these services, coupled with its regulatory functions, might prove too much a burden to the central banks. 

Conclusion 

There is no denying that the future of money is digital. Some world economies like China have already fronted digital money as the primary mode of exchange in their marketplace. However, that is not the case in the EU. Even though it seems like digital currency is the way to go, most consumers still prefer cash. 

The digital currency also comes with multiple concerns about the role of banks in economies. It might elevate the central bank as the only player while eliminating commercial banks. Such changes are legally unattainable and economically inefficient

Ultimately, while the CBDC is possible, it can only work once the central bank addresses all the emerging concerns. 
 

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