The ECB’s digital euro is on its way – how will it affect crypto?

0
2

ECB executive board member Fabio Panetta spoke at the National College of Ireland about the bank’s plans to introduce a digital euro within the next four years, with implementation scheduled for late 2023.

“A digital euro would fortify our monetary sovereignty and provide a form of central bank money for making daily digital payments across the euro area, just like cash for physical transactions. To succeed, a digital euro will need to add value for users, foster innovation, and enjoy strong political and societal support,” Dr Panetta said. The comments follow Christine Lagarde’s announcement of a two-year investigation to study the possibility of launching a digital euro.

Cash is increasingly being phased out as a form of payment. Over the past 15 years, the amount of cash in stock being used for payments has fallen from 35 percent to just 20 percent. According to Fabio Panetta, increasing consumer reliance on non-cash payments and the expansion of crypto assets require immediate action by the central bank to foster digitalization.

They finally realize crypto is more than a buzzword

It turns out that Panetta admitted that cryptocurrency is not a niche financial instrument, nor is it a fad or a bubble that will burst, as high-profile bankers had previously claimed. There is now no doubt that this system has a great deal of real and solid public support.

This is an important milestone, illustrating cryptocurrency’s increasing importance and its inevitable replacement of traditional finances. As someone who has been involved in the crypto industry since its early days, I’ve seen a big shift in perception of crypto. Watching governments wake up to the value of digital currencies and hurriedly jump on the digitalization bandwagon is particularly amusing.

According to Dr Panetta, if the current trend continues, cash will no longer play a central role in consumer finances and they will shift toward digital methods of payment. “If the official sector, central banks and supervised intermediaries, do not satisfy this demand, others will,” he said.

In other words, he says something along the lines of “More than 1 trillion dollars of the crypto market are out of our hands, and we need to act quickly to remain in control.”

Throw enough mud at the wall, some of it will stick

Along with acknowledging that crypto is the future, Dr Panetta dismissed decentralized crypto as too risky and unreliable, siding with Christine Lagarde’s criticisms of cryptocurrencies.

It is essentially an example of harming your rival’s reputation in order to make your product look more attractive – something that all central banks do in promoting their CBDCs.

“Despite claims that cryptos are a trustworthy form of “currency” free from public control, they are too risky to act as a reliable means of payment,” Fabio Panetta said. “Anyone investing in cryptos must be prepared to lose all their investment,” he warned.

Cryptocurrencies versus CBDCs: who will win?

A central bank’s digital currency is not that different from a traditional fiat currency it issues. Simply put, it’s a digital version of fiat currency that has the convenience of digital assets.

Taking into account that nine countries globally have already implemented CBDCs, and that the Federal Reserve is working on rolling out a digital dollar, it’s not hard to conclude that the governments’ agendas in regards to cryptocurrencies will be to drag them through the mud – as evidenced by multiple statements from officials.

Governments could introduce mechanisms for recovering money sent to the wrong address and regaining lost wallet keys via ID checks, all of which may be able to attract massive users quickly.

On the other hand, a CBDC that lacks privacy is no replacement for crypto, and the public is not likely to accept it. If the government devises a strategy that protects privacy and keeps its users safe from bad actors, CBDCs have a good chance of succeeding.

Since decentralized cryptocurrencies are highly dependent on mass adoption, they may struggle to grow in value as they would be competing directly with centralized currencies, which would drive users away from them.

A digital euro as well as the Fed’s own digital currency would also affect crypto regulations. The EU and the US have allowed free-market crypto trading so far. But once CBDCs become law, this may change. A rocky history for China with cryptocurrency includes allowing it, then banning it, and then ramping up efforts to launch a digital yuan.

For governments, cracking down on crypto is the easiest way to avoid direct competition. As soon as Europe and the United States have their CBDCs in place, this scenario could unfold as well. At least there’s no doubt that regulators would restrict the use of decentralized cryptocurrencies.

Bottom line

There has been growing evidence that governments worldwide, with the ECB being one of the most recent examples, are planning to launch central bank digital currencies to meet consumers’ increasing demand for digital assets. CBDCs, however, are not the same as decentralized cryptocurrencies, and do not have the same intention of bringing financial power to the ordinary people with which crypto was born.

Governments reject the concept of decentralization, claiming that cryptocurrencies are unreliable, unsafe, and therefore shouldn’t be used. Instead, they advocate centralized CBDCs. Those motives are understandable; cryptocurrencies allow citizens of a country to bypass capital controls imposed by their government. The elimination of intermediaries might destabilize existing financial infrastructures, which is why governments are taking these steps.

In summary, we have gone from governments mocking crypto to realizing its potential, to fostering an alternative and labeling cryptocurrency as something people should be wary of. To what extent crypto will continue to exist after government-controlled coins such as a digital euro or dollar are created remains to be seen.

The post The ECB’s digital euro is on its way – how will it affect crypto? appeared first on Invezz.

LEAVE A REPLY

Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.