Jens Weidmann, Head of Germany’s central bank, is not convinced the time has come for a digital euro. Banks should improve their payment services instead of calling for the state.
Last week, the European Central Bank published “EuroChain,” a proof-of-concept describing a prototype of a digital euro. 18 European central banks are taking part in this initiative.
But not everyone is convinced a digital Euro would be a good idea. Jens Weidmann, Head of Germany’s central bank, told Handelsblatt that the European Union should refrain from launching a digital euro, at least at this point.
Banks should improve their payment services instead of calling for the state
Weidmann believes its too early. Instead of a digital euro, banks should improve their payment services to compete with the growing cryptocurrency market. “I don’t believe in always calling for the state right away. In a market economy, it is first up to private enterprises to develop an appropriate offer for customer requests,” he told Handelsblatt.
According to Weidman, a digital euro was also not the answer to Facebook’s blockchain-based digital currency Libra. While Libra might be of use in developing countries, Weidmann believes the euro proved its stability for decades and won’t easily get replaced by a social-media-based cryptocurrency.
Digital euro could threaten financial stability
While Weidmann does not seem to be worried about Libra being a threat to financial stability in the eurozone, he warns a digital euro might be more dangerous. ´
“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,” says Weidmann.
He recommends proceeding with caution. “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.
China not a concern: a free market economy will find better solutions
A going concern in Europe is the competition from China. The People’s Bank of China has announced to issue a digital Yuan, potentially already within this year. The concern is that a Chinese digital currency could establish a leading position in the digital currency market, making it harder for latecomers to compete.
Weidman doesn’t share this concern. He said China might be faster, but it also has a different political system. “The state has a wealth of power there that many of us would not like. I believe that a free market economy will ultimately find better solutions,” said Weidmann.
The German central bank experiments with blockchain technology
Germany’s central bank is itself experimenting with blockchain technology, but focusing on payment transactions between the central bank and commercial banks. Specifically, the central bank is experimenting with blockchain to supplement its central, account-based solution.
However, the results were not meeting expectations. “In our special context with a few business partners we know, blockchain is initially no more efficient than central processing,” said Weidmann.
That said, he does believe blockchain technology, in particular, automation through smart contracts, will play an increasingly important role in the financial industry.
Does that mean we won’t see a digital euro anytime soon? Weidmann, despite his prominent standing in Europe’s community of central bankers, is facing opposition. Christine Lagarde, ECB’s President, announced the creation of a task force and seemed to be more convinced of a digital euro than Weidmann. Considering how fast the technology evolves, it’s not hard to envision Europeans using an “ECB Coin” at some point this decade.