German central banker warns against a digital euro

The president of the Deutsche Bundesbank, Dr. Jens Weidmann, said in an interview with German newspaper Handelsblatt that a digital euro was not the answer to a perceived threat from blockchain-based digital currencies such as Libra. Instead, he says that banks should work on improving existing payment services.

Head of Bundesbank says “Nein” to ECB Coin

“I don’t believe in always calling for the state right away. In a market economy, it is first up to enterprises to develop an appropriate offer for customer requests,” he told Handelsblatt.

However, Weidmann does recognize the value of a digital payment system such as Libra in developing countries. However, he believes the euro – in its current form – is a currency that has proven its stability for decades.

While a number of his peers, including ECB president Christine Lagarde and ECB executive board member Benoît Cœuré, envision the introduction of a digital euro in the near future, Weidmann believes it is too early to introduce an “ECB Coin.”

“First of all, it’s about understanding the positive and negative sides of digital central bank money. Then, it can be decided whether it is needed and the risks can be controlled,” he stated.

He also has concerns about how a central bank-issued digital currency that interacts directly with retail customers might affect financial stability.

“Digital central bank money can change the fundamentals of the financial system and make it more insecure. Depending on the design, customers might switch from bank deposits to digital central bank money on a large scale and deprive banks of an important source of finance. The risk of a bank run in a crisis situation could also increase,” he elaborated.

Weidmann also does not believe that current blockchain systems are more efficient than existing centralized systems when it comes to interbank payments between the central bank and commercial banks.

However, he does think that the financial industry will adopt blockchain technology due to efficiencies such as smart contracts that can enable securities transactions in an automated manner, for example.

When ECB coin?

Despite Dr. Weidmann’s conservative stance towards launching a digital euro, the fact that China is reportedly preparing to launch a digital yuan will force other major economies to consider their options.

While China has the ability to implement a new digital currency much faster than other nations due to its political system, if its new digital currency increases the country’s ability to control money flows and enact monetary policy measures, other nations will eventually follow.

Central bank digital currencies (CBDCs) were a major narrative last year with several central banks researching the possibility of launching a digitized version of their fiat currencies.

In 2020, we expect CBDCs to continue to be a hot topic as cryptocurrencies are increasingly recognized as a potential threat to existing payment structures.

Whether Europe will be the next region to launch its own digital currency remains to be seen but judging by how fast blockchain technology and cryptocurrencies have evolved in the last decade, it is hard not to envision Europeans using an “ECB Coin” at some point this decade.