In Europe, a central bank digital currency (CBDC) has inched closer to reality, by virtue of a vote.
As a result, the United States may have to play a bit of catch-up. In addition, per the European Union’s inclinations, the CBDC would be best suited as a payment vehicle, not as an investment holding — perhaps setting the stage for CBDCs to muscle stablecoins and cryptocurrencies off the stage as any real means of commerce.
The parliamentary European Committee on Civil Liberties and Justice voted to support draft legislation that, with the committee’s suggested amendments, would make a digital euro legal tender. Separately, in a blog post from earlier in the week, a trio of European Central Bank advisers and directors urged that a digital euro be used as a payment method, and not be held for investment.
“To preserve the economic function of commercial banks, individual digital euro holdings would be limited,” they said in the post. “Merchants would be able to receive and process digital euro but would not be able to hold them at all — protecting the corporate deposit base of the banking system. Moreover, digital euro holdings would not accrue interest.”
They posited that “a holding limit and no remuneration” would “reduce incentives to keep” CBDCs in a digital wallet — and by extension pose risks to bank funding.
A more cautious tone was struck in the blog regarding stablecoins: “Stablecoins, eMoney institutions and other narrow bank constructs, some sponsored by Big Tech companies with huge customer bases, do not care about the role of banks in the economy. Nonbanks have no obvious incentive to limit the use of their stablecoins or the services they offer, and the use of stablecoins could become significant.”
US to Make More Moves?
The regulatory path toward a digital euro will likely be a long and winding one. But the most recent developments may hasten at least some movement in the U.S. to accelerate exploration and development of a digital dollar.
A posting on the Federal Reserve website last week said: “If one or more large countries were to introduce an internationally accessible CBDC that were appealing across several dimensions — such as cost, speed and user experience — then the appeal of these currencies might gain on the margin, at least as a transaction medium, at the expense of the dollar if there were not an equivalent dollar option.”
Call it the equivalent of the digital central banking arms race.
The casualties of that arms race might be stablecoins and cryptos (which are not backed by, well, anything). Various regulators have said that stablecoins might cause bank runs by virtue of volatility despite the promise (although not the reality) of holding onto pegs. Separately, Coinbase decided last week to drop support for native bitcoin payments from its merchant platform, Coinbase Commerce.
PYMNTS Intelligence revealed that only about 5% of credit unions offer crypto investing services, and only another 5% plan to offer investing services tied to these digital holdings in the current year. Meanwhile, just 1% of banks offer cryptocurrency, and another 1% plan to do so this year.
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