European Central Bank: Stability risks may arise if central banks do not provide digital currencies

The European Central Bank (ECB) published a report in June explaining that Central Bank Digital Currency (CBDC) is important for the current international monetary system. The conclusion even states, "If central banks do not provide digital currencies, there may be stability risks."

ECB June Report: CBDC's Importance for Currency's International Status!

The report titled "The international role of the euro, June 2021" in June 2021 emphasized the significance of introducing a central bank digital currency (CBDC) for the euro if the non-cash usage in Europe increases or if foreign digital currencies start impacting the domestic currency. While the primary objective of issuing a digital euro would not be to enhance the currency's international status, it would indeed be beneficial.

The report suggests that a currency's international appeal primarily stems from economic fundamentals and cannot solely be driven by digitization. However, digital payment methods can enhance the international adoption of CBDCs, such as providing a low-cost payment method for trade, attracting companies to store value in that currency. Additionally, it could also become a primary currency for third-world countries to combat their economic instability.

Attention! Central Banks without CBDCs May Face Stability Risks

The report concludes that central banks without digital currencies should be wary of stability risks. If non-domestic payment providers dominate the local and cross-border payment markets, it not only threatens the overall financial system's stability but also impacts individuals and businesses who rely on major service providers. ECB specifically mentions that foreign tech giants could introduce synthetic currencies. This description could almost directly apply to Facebook's previously named Libra, now known as Diem.

The report states that such foreign synthetic currencies could influence the execution of central bank monetary policies as the last lender. Therefore, issuing CBDCs to maintain the autonomy of the domestic payment system and the international usability of the currency in the digital world is essential.