To keep up with the crypto-boom, central banks all over the world are now analyzing the idea behind the issuance of digital currencies. Multiple nations are racing to be the first to implement a Central Bank Digital Currency (CBDC), the European Union has also entered the space to test out various use cases of a state-backed crypto.
Through its EUROchain concept, the ECB is exploring the case of anonymity in central bank digital currencies. It identified DLT as an option that helps strike a balance between a certain degree of privacy in electronic payments and ensuring compliance with regulations aimed at tackling money laundering and the financing of terrorism (AML/CFT regulations).
CBDCs would have revolutionary consequences
Recently, in an interview at the BAFT Global Annual Meeting, Yves Mersch, Vice-Chair of the Supervisory Board at the European Central Bank said that he believes that a central bank digital currency “could wipe out the banking system.”
Talking about CBDCs, Mersch further said:
“We are testing the different technological products to see what would be possible, what would be technically feasible for us, what would be legally feasible for us. And there is a huge variety of possibilities in Central Bank digital currency, which would have more or less revolutionary consequences.”
The ECB exec also believes that digital currencies could render the present banking system completely useless. Further arguing on the idea of a banking system wipe-out and risks involved, he explained:
“Then: who will issue the economy with loans? If it is not the banks who have the deposits that they transfer into loans, they would need to raise money somewhere else. That will increase their funding costs in order to cover it, they need to take more risks and so on”
Long way to go
Mersch also discussed that the ECB has been analyzing the space to increase knowledge from the technical and academic standpoint, the central bank is very far away from a political decision on any implementation. He said:
“So there are a lot of questions that need to be discussed […] I would say, side, but we are very far away from a political decision on implementation.”
In an interview with French business magazine Challenges, Christine Lagarde president of ECB, shared a similar notion when talking about the ECB’s dedication to the exploration and development of a CBDC. She stated:
“ECB will continue to assess the costs and benefits of issuing a central bank digital currency that would ensure that the general public remains able to use central bank money even if the use of physical cash eventually declines.”
As of now, the ECB is still in the research phase and wants to study the technology. Europe has been very strict about private cryptocurrencies like Facebook’s Libra and had blocked its development. Almost four months after that, The European Central Bank responded to Libra with its DLT-based project ‘Eurochain.’
Upon studying the Eurochain whitepaper, the digital currency to be issued by the ECB looked strangely familiar to Facebook’s Libra. This proved that the regulators wouldn’t like to lose control. Comparing Libra and EuroChain, these are just two projects which utilize the blockchain but in the most antithetical way.