Representatives of the EU banking sector are expressing concern that the introduction of the digital euro (CBDC) could trigger a severe economy-wide banking crisis.
Representatives of the European Central Bank (ECB) responded to questions from EU banking associations. They claim that the introduction of the digital euro will incite a mass exodus of clients from their foreign exchange intermediation services.
In particular, bankers are concerned that the issuance of CBDCs will prompt depositors to move their funds from bank deposits to the central bank. This will result in commercial banks losing the ability to use deposits as a source of refinancing in the long term and no longer being able to lend at acceptable rates.
However, Piero Cipollone, Ulrich Bindseil, and Jürgen Schaaf, members of the ECB’s Executive Board, argue that bankers’ concerns are unfounded. The digital euro infrastructure was designed to mitigate such risks. CBDCs will feature a limited storage capacity in digital wallets, and users won’t receive any compensation for holding them. The ECB officials assert that the digital euro is being developed primarily as a means of payment, not as an investment tool.
Officials also emphasized that previous banking crises and mass withdrawals weren’t triggered by reductions in retail deposits, contrary to bankers’ claims. Significant withdrawals were typically caused by wholesale market incidents or withdrawals of substantial individual amounts. Furthermore, the ECB reps highlighted that stablecoin issuers and e-commerce institutions backed by major technology firms pose a greater threat to bank funding, as they amass vast customer bases but disregard the role of banks in the economy.
Another important aspect in developing the digital euro concerns the establishment of a payment infrastructure for CBDC distribution. Cipollone, addressing the European Parliament Committee on Economic and Monetary Affairs, said that the digital euro should serve as legal tender within the EU. This would free users from relying on international payment systems by establishing a unified settlement system. This approach to digital currency was criticized by Christian Pfister of the European Monetary and Financial Forum (SUERF), a non-profit networking association of bankers and financial experts. He believes that the ECB violates several legal aspects by including private payment systems like Amazon, whose participation became known at the end of 2022, in the processes of developing the European CBDC.
The ECB’s digital euro plans encompass:
- exploring potential suppliers for the digital euro platform and infrastructure development;
- formulating regulatory guidelines for digital euro usage;
- safeguarding financial system stability;
- ensuring a high level of privacy in digital payments.
The digital euro pilot project entered a new phase at the close of 2023, following which the European Commission promised to make a definitive decision regarding CBDC issuance in the EU.
