Digital Euro Could Either Help or Harm Economy, ECB Paper Says

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(Bloomberg) — Digital central bank money for use by the general public could help monetary policy to reach the economy more directly, according to research by the European Central Bank. It could also have the opposite effect, though.

A central-bank issued digital currency would allow people in the euro area to deposit with it directly, providing a risk-free avenue for using money in an increasingly online economy, a publication by an ECB task force said Friday. Holders of a such a euro might, however, induce the draining of liquidity from the financial system, which could be particularly dangerous during downturns.

“Depending on its specific features, central bank digital currency could either allow monetary policy to reach a wider range of economic actors more directly or weaken the tools available to the issuing central bank for the conduct of its monetary policy,” the paper said.

Read more: Critic Warns Against Central Banks Issuing Own Tokens

The advent of crypto-assets has prompted a debate among central banks around the world about whether they should issue their own digital currencies in order to keep up with latest innovations in technology and meet demand for payment alternatives. The ECB task force says it doesn’t see a need at present for such an initiative in the euro area, but will continue to evaluate it based on evolving global developments.

“These may range from changes in the needs of EU citizens, channeled by EU authorities as a public interest, to a considerable decline in the use of cash, or the unprecedented event of another central bank issuing a central bank digital currency that is available cross-border,” it said.

Central banks currently provide physical money in the form of cash and digital money in the form of reserves, yet the latter is only available to commercial banks and selected institutions, like governments.

In the same publication, the ECB task force also argued that crypto-assets like Bitcoin should not be considered as competing forms of digital currencies, as they are not tied to monetary institutions.

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