The introduction of a digital euro would strengthen consumer privacy and protect the euro zone from the “threat” of competing cryptocurrencies that could undermine the bloc’s monetary sovereignty, according to the central banker who oversees its development.
Fabio Panetta, a member of the board of directors of the European Central Bank, told the Financial Times that one of the main goals of the project is to combat the spread of digital coins created by other countries and companies.
“If the central bank gets involved in digital payments, privacy will be better protected. . . because we are not like private companies, ”he said. “We have no business interest in storing, managing, let alone abusing, user data. “
“Of course, there is a potential threat that could come from others issuing a digital payment method. . . If people want to pay digitally and we don’t offer them a digital payment method, someone [else] would do that.
He pitted the digital euro – an electronic version of cash issued by the central bank – against “volatile coins” such as Diem, Facebook’s planned digital currency which would allow users to send money as easily as texting.
The recent ECB decision consultation on a digital euro found that people’s biggest worry was that it erode their privacy. But Panetta said the central bank has been testing ways to separate people’s identities from their payment details. “The payment will be made, but no one in the payment chain will have access to all the information,” he said.
The central bank has also tested “offline payments for small amounts, in which no data is recorded outside the wallets of the payer and the payee,” he said; transfers of up to € 70 or € 100 could be made using a Bluetooth link between the devices.
“For very small amounts we could allow truly anonymous payments, but in general confidentiality and privacy are different from anonymity,” said Panetta, adding that some verifications would be needed on most transactions to avoid money laundering, terrorist financing or tax evasion.
“A payment can be reconstituted [after the event] if the police want to assess whether there has been any illegal activity, ”he said.
Almost two-thirds of the world’s central banks are conducting practical experiments on whether to launch digital currencies, according to the Bank for International Settlements.
But commercial banks fear that central bank digital currencies could erode their deposits, especially in a crisis. Morgan Stanley has estimated that up to 837 billion euros, or 8% of euro area bank deposits, could switch to the digital euro.
It could also crowd out money, some critics have argued; more than half of German households recently polled by the Bundesbank expressed skepticism about a digital euro, and frequent cash users were the most skeptical.
Panetta said a digital euro would bring “a fundamental change in the way payments, the financial system and society as a whole will operate,” for example by being “programmable” to allow automated payments, such as road tolls or in a cinema. .
But he said the ECB was determined to ensure that the digital euro doesn’t undermine the commercial banking system, replace cash, crowd out innovation, or become a shadow currency in small countries.
To achieve this, it plans to either cap the amount anyone can hold at € 3,000 each, or impose “disincentive compensation” above that threshold, Panetta said.
The ECB’s Governing Council will meet next month to decide whether go forward with the preparations and Panetta said it could be ready for use in about five years.
The central bank will also complete its new framework for monitoring private digital currencies and crypto asset providers by the end of this year, he said.
Crypto assets such as bitcoin are “very dangerous animals” that are “widely used for criminal activity” and consume “an enormous amount of energy,” Panetta warned.
So-called stablecoins such as Diem are believed to be more secure because they are backed by fiat currency reserves, but Panetta said the potential volatility of those reserves creates “an inherent instability in the function of these coins – and for this reason. , they are still unstable. coins”.
Regulation and supervision of crypto assets is difficult “because there is no responsible legal entity,” he said. “It’s decentralized. They could be in China. They can be in Switzerland or South America. . . But to the extent that intermediaries are involved in providing these crypto assets, then we would have regulation and oversight in place. “
The digital euro should be made available in limited quantities for tourists visiting Europe, Panetta said, but the ECB “should think very carefully about access, and up to what limit, for foreign users”.
Major central banks are in talks to ensure their digital currencies remain “interoperable”, Panetta said, as this would help “make cross-border payments more efficient and much cheaper”.