Commercial banks facing the threat of the digital euro

Source: Observatorioblockchain / Javier Callejo

The success of the future digital euro could lead to central banks absorbing the financial flow of the economic system. They would centralize it in an almost absolute way, leaving private banks in a marginal role. Digital currencies issued by central banks (CDBC) emerged as a potential response to the threat with which the Meta announcement was received. The central banks, which had established themselves as protagonists of monetary and economic policies since the eighties of the last century, saw that with the digitization of currencies they could lose power of action, if they did not react quickly. Thus, with greater or lesser haste, they began to work on the design of their respective CDBC. Among them, the central bank of the central banks of the 19 countries of the European Union that have the euro as their currency. The ECB began to explore and take the first steps towards the construction of the digital euro.

Digital Euro, the most important economic event of the last hundred years

digital euro banks

It cannot be said that the construction of the digital euro is going fast. The sense of threat appears to have abated, especially given the latest developments at Zuckerberg’s company. It may even have spread the feeling of having her domesticated. Of course, indirectly through the leash of the US economic authorities. In recent months, Meta has come under strict scrutiny from the Federal Trade Commission. On the other hand, inflation, energy shortages and the war in Ukraine itself have raised other priorities.

Currently, the ECB is still discussing the characteristics of the digital euro. It is in the research phase. A phase that will last, at least, for another year. They do not seem to be rhythms adapted to the accelerated times that we are going through; but administrative institutions, especially if they are supra-state, are like that.

How will the digital euro affect commercial banks?

The long term of the ECB is allowing the circulation of reflections on the potential consequences of the digital euro. Among them, one scenario occupies a stellar place: that of people taking their deposits to the central bank, massively welcoming the new currency. That is, at first, it would be a successful scenario. The projection of a successful scenario that could paradoxically be at the origin of pressures for the digital euro to delay its exit, carry it out with certain restrictions or even abort its gestation.

Savings at central banks

The main reason why citizens would transfer their savings from private banks to the central bank is security. Private banks live the last decades under the shadow of bankruptcy. Central banks are safe from bankruptcy. After all, the central bank can create money. A fear of bank failure that, furthermore, can accelerate and, above all, intensify when savers themselves begin to transfer money to the new centralized digital money. In this way, the goodbye to the banks that the former governor of the Bank of Spain, Miguel Ángel Fernández Ordóñez, prophesied a couple of years ago would be fulfilled.

The key questions of the digital euro a few days after starting its journey

The reflection brings us back to the original function of banks and their current potential alternatives. In sociology there is a deep-rooted line that, in the face of events, begins by asking what social problem this or that institution or role solves and if there is the possibility of alternative forms of providing a better solution to that problem. Well, banks emerged especially to solve the problem of remote payments, in a place other than where they usually reside, for example, the buyer of a significant amount of merchandise. From this point of view, today any digital device -computer, smartphone- becomes a bank. Paying was its central operation and today it can be done in many ways. Some of them globally accepted.

Financing of the economy

From the fact of the accumulation of money in their safes, the other great social problem they faced is that of financing the economy. To lend to others, other than depositors, part or almost all of the money they had. And this has been the great role of banks in recent centuries and, to put it succinctly to the point of caricature, the core of their business: to capture money from savers to lend it, at a higher price than that paid to those savers, to the entrepreneurs, investors and citizens in general.

The impact of CBDCs on the monetary and financial systems

Now, if with the digital euro savers withdraw money from banks, the credit problem, which is the social and economic problem that banks are trying to solve, would increase. Private banks would not dispose of it directly or would have to request it -lent, in turn- to the central bank. The business of private banks would falter and the economy in general could have serious financing problems.

With the digital euro, the central banks would absorb, centralizing it, a large part of the financial activity. It would suck the financial blood of the system. Bram Stoker’s novel,  Dracula , has always seemed to me to be a representation of the State… Something that absorbs the blood of his subjects, once he is invited, like the famous vampire, to enter the room.

CBDC: the digital money of the States that brought the cryptocurrency of Facebook

reactions

In this game of imagining futures, there would be several reactions to the drawn situation. We will focus on the two most direct.

The first is that the central bank began to operate as banks do now. It would not only collect deposits from individuals with the digital euro. It would also assume credit operations. This would deepen the crisis in private banking, leaving it without space. However, even though the digitization, automation of processes and algorithmization of decisions of banking operations were carried out at a speed socially unimaginable today, central banks do not have the human and material resources to carry out this response.

How can the issuance of private stablecoins affect the digital euro?

The other direct response is that the banks assume this tightening of the nuts of competitiveness, now having the central bank itself as the preferred actor in that competition. Banks would have to compete with the central bank, being more attractive to people’s money deposits. That is, offering advantages and services that the central bank does not provide. The transformation of banks in recent years from entities that pay for the money they receive and charge for the money they give, into service entities that offer services to their customers, must be taken into account. It was at the historical origin of banks and in societies as heavily banked as ours it offers great opportunities. Here the central bank would pose little or no competition.

The electricity meter linked to a cryptocurrency wallet

However, banks also have to activate the imagination. A tough competition in which traditional banks are not only challenged by other traditional banks, but by a growing number of nimble new banks and a highly developed payments industry. This is without taking into account the competition that could arise from the extension of the use of cryptocurrencies, especially to provide payment services. Think -just as an imaginary example- of the possibility of automatically linking the expense recorded daily on the electricity meter to a cryptocurrency wallet.