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A digital euro would improve financial inclusion and provide cheaper, faster payments, but it represents a risk to traditional banks, says Moody’s Investors Service.

Last week, the European Central Bank (ECB) launched a two-year project to design a possible central bank digital currency (CBDC) — the digital euro — as a complement to cash and not a replacement for it.

In a new report, Moody’s said that a digital euro would likely increase financial inclusion, “by offering access to a direct claim on the ECB.” At the same time, the currency solution promises the potential for quick and cheap cross-border payments.

For traditional banks however, the project poses risks, Moody’s said. “A digital euro would likely increase euro area banks’ funding costs and reduce their fee income, increase disintermediation risks and hurt their already-weak profitability,” it added.

For instance, in countries with relatively weak banking systems, such as Cyprus or Greece, customers would likely choose a digital euro over a commercial bank deposit, Moody’s said — adding that this development “could tighten bank funding and increase lending costs and disintermediation risk.”

“Banks also face losses of fee and commission income from payment services if customers were to use a digital euro for transaction business,” it added.

Ultimately, the extent to which a digital euro is adopted and affects the financial system “will depend on key operational and design choices,” Moody’s noted. “These choices, which include account limits, remuneration of CBDCs and the potential tiering of accounts, will be important aspects.”