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European Central Bank’s Move Toward Digital Euro Puts Spotlight on Central Bank Digital Currencies

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The European Central Bank’s (ECB) recent move towards launching a digital euro has sparked both excitement and skepticism about the future of digital currencies. While several countries, including China and India, are exploring the concept of central bank digital currencies (CBDCs), questions remain about their potential benefits and risks.

The ECB’s announcement to establish a pilot for a digital currency, potentially for the 20 countries that use the euro, marks a significant step forward. If successful, it could serve as a global blueprint for other central banks considering CBDCs. Supporters argue that CBDCs will modernize payment systems, offer new functionalities, and provide an alternative to physical cash, which is slowly declining in usage.

However, concerns have been raised about the adoption and feasibility of CBDCs. Some countries, like Nigeria, have seen low uptake of digital currencies, highlighting potential issues with public acceptance. Additionally, protests against the ECB’s plans have shown public concerns about privacy and government intrusion.

Commercial bankers are worried about potential costs and the possibility of deposit outflows as customers may move their money into central bank accounts. Developing countries also fear the impact of accessible digital dollars, euros, or yuan on their financial systems.

The ECB’s plan is closely watched by the rest of the world, given its influence as one of the largest central banks. It is expected to provide answers to privacy and cybersecurity concerns, as well as offline usability. Central banks globally are keen on understanding the benefits of CBDCs, particularly after Facebook’s proposal for a breakaway currency five years ago.

While the ECB claims that a digital euro would “future-proof” the currency and reduce reliance on US-based credit card payment systems, experts remain uncertain about what unique features a CBDC would offer compared to commercial bank money. Lee Braine, Barclays’ managing director of advanced technologies, highlights the risk of a two-tier system if CBDCs have different functionalities and data disclosure rules than traditional bank accounts.

The future adoption of CBDCs depends on the stance of other major central banks. The US Federal Reserve and the Bank of Japan have yet to decide whether to launch retail CBDCs. India, with its more open economy, could provide a more effective test environment than China. On the other hand, Canada and some other countries appear to be proceeding more cautiously. Current data from the Bahamas, which launched the world’s first digital currency in 2020, shows declining personal transactions and wallet top-ups.

The International Monetary Fund (IMF) is actively involved in assisting dozens of countries with their CBDC plans and plans to publish a guide on how to implement them. The IMF is also developing its XC platform to process CBDC transactions. These developments, along with the technology choices made by the ECB and India, could determine a global standard for CBDCs, similar to how VHS dominated the early era of videotapes.

Ultimately, the success of CBDCs depends on how they improve the existing financial system. The main goal is to ensure that CBDCs offer tangible benefits and address the concerns of various stakeholders. As the ECB’s digital euro pilot progresses, the world will be watching closely to see if this milestone move proves the worth of the newest incarnation of money.

More detail via Malay Mail here… ( Image via Malay Mail )

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