Ever since Facebook, now Meta, launched the Libra (Diem) project in 2019, in partnership with twenty or so other companies, including MasterCard and Visa, nation-states worldwide have been in a hurry to develop digital versions of their sovereign currencies, also known as Central Bank Digital Currencies, or CBDCs for short.
In China, which has, by far, come furthest in this run. The roll-out of the digital yuan is now in full swing, driven forward by the Winter Olympics. The Beijing Olympics is in all likelihood the final test before the digital yuan will be widely introduced into the Chinese economy.
Most nation-states are in research mode
Other nation-states, including the U.S, are far behind China. In the European Union (EU) the European Commission announced Wednesday it’s planning to propose a bill for a digital euro early next year. Politico reported that the bill will serve as the legal foundation for the European Central Bank’s ongoing technical work on the virtual version of a euro banknote or coin.
In the U.S, The Federal Reserve has released the first results of its CBDC research and taken its first step towards issuing a central bank digital currency (CBDC). Project Hamilton, a research project between the Boston Fed and Massachusetts Institute of Technology (MIT), has released the first round of results in modeling a digital dollar.
As many in the U.S partition of the crypto industry like to point out, the U.S. already has digital dollars in the form of privately issued stablecoins such as USDC. These stablecoins have already made a mark in the economy as they’ve become hugely popular in the crypto industry and could constitute an alternative way forward for the U.S.
Most U.S. lawmakers, however, are reluctant to listen to the arguments suggesting to let the private market do the job, unless, of course, those currencies would be issued by traditional chartered banks.
Governments are feeling the FOMO
There’s no doubt the advent of cryptocurrencies such as Bitcoin (BTC) has spooked many legislators around the globe. Central banks are developing digital currencies to ensure they’re not left behind by the growing popularity of cryptocurrencies.
“If we don’t satisfy this demand, then others will do it,” ECB Executive Board member Fabio Panetta told Members of the European Parliament (MEPs) in mid-November. “As co-legislators, you will play a key role in any changes to the EU legislative framework that may be necessary to introduce a digital euro.”
The proposed bill will work in conjunction with the research carried out by the European Central Bank (ECB). The ECB expects to start working on a prototype at the end of 2023. Only after then will the Eurozone legislators decide if an introduction of a digital euro is worth the effort. If so, the digital euro could be set to launch by 2025.
Payment privacy top concern in the poll
Meanwhile, public consultation is set to emerge from the EU Commission next month. The consultation will work in parallel with the ECB’s public call for comment from 2020, which found payment privacy was the top concern among respondents.
The Commission’s consultation will focus on how the digital euro could be used for handling everyday payments, among a host of other functions. EU’s Chief of Finance, Mairead McGuinness (Ireland) announced the Commission’s legislative plans Wednesday morning at a fintech conference by Afore Consulting.
“Our goal is to table legislation in early 2023. A targeted legislative consultation in the coming weeks,” McGuinness said.
Part of the process is to assess what safeguards are needed to prevent the introduction of the digital euro from destabilizing the financial system. Among other concerns, banks have expressed fears that people might easily convert their deposits into the euro CBDC if there’s another financial crisis, thus creating an online bank run.
Germany and France are pushing forward
Though the ECB’s Governing Council has the final say on whether a CBDC is needed, some EU member states, such as Germany and France, are already convinced of the benefits of a digital euro. Both countries have urged the ECB to speed up the process amid fears that the eurozone could get left behind.
“We must push forward with full speed. No one will wait for us,” German Chancellor Olaf Scholz told reporters last year when he was finance minister.
“I am convinced that eurozone countries need to take part more actively in the process and play a stronger role.”
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