A Statement since 2019
Recently, there has been a lot of talk about the adoption of digital currencies by some central banks. China's Crypto-Yuan was like an alarm for other countries interested in this Blockchain technology. In addition, there is also the coronavirus epidemic which favors the race to create digital currencies because cash has become a potential vector for virus transmission.
This time it is the turn of the European Central Bank to seize the innovation. We may have forgotten a bit but the adoption of a crypto-Euro has already been a topic during the second half of the year 2019. It all started with the Minister of Economy and Finance, Mr. Bruno LE MAIRE who mentioned the term: Digital Euro. Then, in November 2019, the Bankenverband, which brings together 200 German banks, called for the creation of a 'Digital Euro'. A declaration supported by Olaf Scholz, the German Finance Minister.
At the beginning of December 2019, Christine Lagarde, who became President of the European Central Bank after leaving her post at the IMF, made a statement before the European Parliament's Economic and Monetary Affairs Committee. She expressed the idea of a 'Euro-token', saying that it had to be framed and secured.
Just a moment after this declaration of Lagarde, more precisely on 04December 2019, it was during a speech in Paris, that François Villeroy de Galhau, governor of the Bank of France and president of the ACPR, in his turn, spoke about 'the possible creation of a digital central bank currency. During the speech, Villeroy made it clear that the Bank would begin experiments quickly in order to launch a call for projects at the end of the first quarter of 2020, while remaining vigilant. He said:
'It is imperative that we study the potentially negative externalities that an MDBC could have on bank liquidity, profitability and intermediation. The risks associated with large and/or sudden conversions of bank deposits to the central bank money will need to be strictly studied,' he explained.
An 'e-euro' to oppose Facebook's Libra?
Certainly, the European active crypto will serve for the financial stability, monetary policy, payments and market infrastructure of the Eurozone, but there is also another reason behind the creation of this digital currency. It is not for nothing that the European Central Bank's statement was made just after Facebook had drawn the wrath of many governments around the world by announcing that it wanted to launch its own crypto currency in June 2019. Apart from that, there was also the American bank JPMorgan, the first in the world, which also announced the upcoming launch of the JPM Corner, backed by the dollar and reserved for institutional investors.
We talked about Libra, this Facebook project in the article Stable coin, the Libra’s solution to satisfy the regulators.
Moreover, the French Minister of Economy and Finance Bruno Le Maire has already clearly expressed his views on Facebook's virtual currency project. In November 2019, following the meeting of the Economic and Financial Affairs Council, he stated :
'We are opposed to the libra project. We do not want the digital giants to increasingly extend their influence to new fields. We do not see what legitimizes the entry of the digital giants into a field of competence that is that of the States - that is to say, currency.'
The Bank of France's ambition is to launch a virtual currency that will be dedicated to 'wholesale' transactions, i.e. very large amounts, from which to counter Libra. The main argument for the creation of this digital currency lies in the ability of European countries to cope with the various external initiatives. It is also an issue of European sovereignty.
According to François Villeroy de Galhau, the Central Bank's digital currency will bring advantages. It can be a response to the sharp decline in the use of cash, as in Sweden. A European virtual currency would make it possible to achieve 'efficiency gains', reduce 'intermediation costs' but also give the possibility 'to exchange one's assets for legal tender'. Villeroy said:
'I see a clear interest in moving forward quickly on the issuance of at least one digital wholesale central bank currency in order to be the first issuer at the international level and thus reap the benefits of a digital reference central bank currency'.
The race for cryptocurrency
States are currently increasing Central Bank Digital Currency (CBDC) initiatives. Apart from the Libra project and the JPMorgan project, China announced in January 2020 that it was close to finalizing a new national cryptography system. South Korea has also announced the possibility of launching crypto-Wan by 2021. Sweden, also very advanced on the subject, has been conducting a project on the creation of e-krona since 2017. Not to mention Venezuela, which has already set up a central bank cryptocurrency in 2018 with the petro.
Having states committing to the creation of digital currencies would potentially lead to a general increase in confidence in the use of cryptocurrency.
Mersch said one of the considerations for the creation of a CBDC is whether the use of cash begins to decline. The decline, if any, is at best modest in the euro area in March, the last month for which he had data, with banknote circulation peaking at nearly €19 billion.