Yesterday, Reuters reported that the European Union issued a document recommending the exploration of consumer digital currencies by its central banks. The leaked draft, obtained by the news firm, further says that financial authorities should build standardized regulations for cryptocurrencies.
Supposedly influenced by the controversial launch of Facebook’s Libra, it reads: “The ECB [European Central Bank] and other EU central banks could usefully explore the opportunities as well as challenges of issuing central bank digital currencies [CBDCs] including by considering concrete steps to this effect.”
Global reaction to stablecoins
Indeed, the ECB’s Benoît Coeuré said that stablecoins, like Libra or China’s upcoming digital currency, could challenge the US dollar. He outlined that the concern caused by Facebook’s announcement this summer “has undoubtedly been a wake-up call for central banks to strengthen their efforts to improve existing payment systems.”
A few days later, the International Monetary Fund explained the possible risks of such stablecoins to global finance. The G7 Working Group Report on Stablecoins, produced by the Bank of International Settlements (BIS), went further in saying that they represent “systemic risk”.
Two weeks ago, ING’s lead economist for digital finance said that Libra has the potential to take influence away from central banks. Libra’s co-creator, Christian Catalina, responded that central banks would still be able to set interest rates and have other abilities, and Facebook’s currency did not intend to challenge fiat currency.
When asked if CBDCs could mitigate this risk, Catalina replied: “of course.” But it’s a challenge, and 80% of central banks either don’t have the authority to issue a digital currency or don’t know if they do.
So it is not a surprise that the EU appears to be taking a similar stance over its concern of Libra and recommends a CBDC.
A digital Euro?
Just last week, the Association of German Banks said it wanted a digital Euro, and would cooperate in its development. But they lack institutional backing. Current CBDC projects are mostly outside of the EU; Canada, China, Switzerland, and Singapore are leaders in the space. Europe also has fewer concrete regulations regarding cryptocurrencies.
However, the EU is not anti-blockchain. Libra is unlikely to be blockchain-based in the sense of decentralization anyway. Two months ago, the EU Science Hub published a report on the state of blockchain, lauding its “huge potential impact”. Its private-public Innovative Medicines Initiative sought blockchain partners last year, and it more recently funded startup Helios.