Digital euro: safeguarding the existing order of our financial system

The digital euro represents a digital version of cash issued directly by the European Central Bank and Euro-area national central banks, including the Central Bank of Cyprus.

It is intended to complement physical cash, ensuring that citizens and businesses have access to a safe, universally accepted form of money in an increasingly digital world. While the digital euro promises several benefits, including increased payment efficiency, enhanced cross-border transactions, and greater financial inclusion, it also raises concerns about the potential disruption of the existing roles and functions of financial intermediaries.

Aside the consequences from the continued decline in the use of cash, and the digital transformation that has made payments ubiquitous in the public’s routines, the established role of banks is being challenged mainly due to the entry of new players outside the realm of traditional banking. These include crypto-asset issuers and big techs that hold entrenched market power and have the capacity to inhibit competition and efficiency. If central banks were to overlook such potentially disruptive developments, we may likely witness an oligopoly of private issuers. The preparations for launching a digital euro have at their core the maintenance of the healthy co-existence of central bank and private money: both must continue to be interchangeable and yet identifiable.

The Eurosystem recognises the importance financial intermediaries currently play in facilitating payments and transactions and for the allocation of credit to firms and households, as well as the role of bank deposits for the provision of liquidity to financial institutions. They will continue to do so with the introduction of the digital euro. In order to preserve this status quo, caps will be introduced for individual digital euro holdings, potentially without incentives regarding remuneration. The ECB is working closely with the financial sector to calibrate holding limits based on three key pillars: usability, monetary policy, and financial stability. By adopting these safeguards, the Eurosystem aims to strike a balance between fostering innovation and preserving the stability of the financial system. It is important to note that holding limits will not restrict payment capabilities. Consumers will still be able to execute digital euro transactions exceeding the holding limit through linking their digital euro wallets to a payment account with a financial intermediary, thereby eliminating the need to hold positive digital euro balances at all. On the other hand, while merchants would accept digital euro payments, maintaining digital euro balances would not be possible, thereby leaving intact the banking system's corporate deposit base. Moreover, the digital euro is being designed as a payment instrument and not an investment means or a savings product. It’s also important to consider that bank deposits can always migrate to providers of stablecoins or other digital assets. Thanks to the mitigation measures that are thoroughly investigated, the digital euro is not expected to be a significant source of concern for banks’ funding. Besides, banks always have the option to increase remuneration rates to avoid losing deposits as a source of refinancing in the long-term.

The objective is to safeguard the existing order of our financial system. Supervised banks and non-banks would distribute the digital euro to their customers without changing existing customer relations. Intermediaries would have economic incentives to distribute the digital euro through a fair compensation model, the functioning of which will be legally enforced. The digital euro would open a new source of revenue for intermediaries to provide value-added services to their customers, such as recurring payments for bills or digital service subscriptions, or pay-per-use enabled via pre-authorisation.

The Central Bank of Cyprus rapports with the local market in a number of ways to raise awareness. Communication with all stakeholders is key, and it is done both through addressing the public at large with speeches, articles and interviews, but also directly with the intermediaries through focus sessions addressed to the National Payments Committee. Such initiatives foster transparency, cooperation, and a shared commitment to a smooth and effective integration of the digital euro. The Central Bank of Cyprus also encourages innovation partnerships; one of the largest Cypriot banks is actively participating in the ECB’s innovation platform, conducting technical testing of innovative use cases. We intend to further intensify our exchange with intermediaries. We encourage our market to be informed by reliable sources, namely from the communication channels of the European Central Bank and the Central Bank of Cyprus and by a continued open dialogue.

*Stelios Georgakis, Director General, Directorate General Payments, Central Bank of Cyprus

This article was published in EuroFi magazine, under the Polish Presidency of the Council of the EU.