The digital euro is a central bank digital currency (CBDC). This digital currency was initiated by the European Central Bank (ECB). So, this article will discuss the meaning of the digital Euro and its impact on the current financial system.
What is the Digital Euro?
The digital euro is a project from the European Central Bank (ECB) to issue a central bank digital currency (CBDC) in the form of electronic money. The digital euro will be digital cash that can be used by the general public in the euro area to make electronic payments.
The digital euro will be a complement to existing banknotes and coins, and will be issued by the European System of Central Banks, which consists of the ECB and national central banks in the European region.
Why is a Digital Euro Necessary?
A digital euro is needed to maintain the role of central bank money as the anchor of the payment system in the digital era. Central bank money is money issued by the central bank and has legal value that cannot be questioned.
Central bank money is currently only available in physical form, namely banknotes and coins. However, people are increasingly using digital payments that use electronic money issued by commercial banks or other payment service providers.
This electronic money does not have the same legal value as central bank money, and could be at risk of being lost if a bank or payment service provider fails.
The digital euro will provide free digital access for people to use safe and reliable central bank money. This currency will give people additional options on how to pay.
A digital Euro would also increase Europe's economic efficiency and strategic autonomy by offering a European means of payment that can be used for any digital payment, which is in line with Europe's social objectives and is based on Europe's infrastructure.
How Does Euro Digital Work?
The digital euro will be stored in an electronic wallet created with a bank or public intermediary. This electronic wallet will allow people to make electronic payments that they usually make, such as in stores, online, or from person to person, using mobile phones or cards, both online and offline.
The digital euro will be designed to the highest standards to protect user privacy and security. The digital euro will also contribute to financial inclusion and encourage digital innovation, including regarding payment programming capabilities.
What Stage Is Euro Digital At?
The preparatory phase, which begins in November 2023, will focus on further preparations for the development of a digital euro. This stage builds on the findings from the investigation stage which took place from October 2021 to October 2023.
The inquiry phase involves public consultations, technical experiments, and legal, economic, and social analysis regarding the digital euro. The preparatory stage involves tasks such as finalizing the rules of the game and selecting a provider to develop the necessary platform and infrastructure, which will set the stage for the possible issuance of a digital euro.
What is the Impact of the Digital Euro on the Current Financial System?
The digital euro will have an impact on the current financial system, especially on the role of banks and financial stability. The digital euro will become a rival to electronic money issued by banks, because people may move some or all of their savings in banks to digital euros.
This can reduce funding sources for banks to provide credit to consumers and companies, and can create tension in the banking system when financial stress occurs.
To avoid these negative impacts, the ECB will design the digital euro in a way that does not replace electronic money, but complements and supports it. One possible way is to impose a limit on the number of digital euros each user can hold, or provide negative interest on amounts of digital euros above a certain limit.
The ECB will also work with banks and other payment service providers to ensure that they can be involved in providing digital euro services to society, and leverage their experience and innovation.
A digital euro would also provide opportunities for the current financial system, especially in terms of increasing competition and diversity in the European payments sector. The digital euro will be a European means of payment that can be used for cross-border payments with low costs and fast turnaround time.
The digital euro will also be an alternative to foreign digital currencies that could threaten Europe's monetary sovereignty and financial stability. A digital euro would strengthen the euro's role as an international currency and attract investment and trade to Europe.
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