With the Bank of Canada in the midst of a new public consultation on a potential digital loonie, the European Central Bank (ECB) is exploring its own digital euro. But the appetite for, and payoff from, official digital currencies remains uncertain, says Moody’s Investors Service.
On May 8, Canada’s central bank launched a consultation on the possible creation of an official digital dollar, which it said could provide a safe digital payment option, enhance financial inclusion, and guard against the risks to financial stability posed by the growth of private cryptocurrencies.
According to Moody’s, the ECB, which launched a two-year project in mid-2021 to explore an official digital currency, has similar goals for a digital euro.
A decision of whether to pursue a digital euro is expected in the fall, it noted, but even then the launch would have to go through numerous approvals, and the currency likely wouldn’t debut until 2025 at the earliest.
“The ECB has ambitious objectives,” the rating agency said. “However, it is unclear whether Europeans will easily adopt the digital euro, because its advantages may not be significant compared to existing means of payment.”
Among other things, Moody’s said there may not be a strong incentive to switch to an official digital currency, as the traditional banking sector is already seen as robust, and deposit insurance fully protects most household deposits.
“This contributes to a high level of stability and in turn means the likelihood of forced sales of securities amid current heightened banking sector stresses remains relatively remote,” it said.
Additionally, a digital euro could face privacy concerns, as it wouldn’t provide the same level of anonymity as cash.
“Full anonymity would conflict with other public policy objectives, such as enforcing anti–money laundering regulations and combating terrorism financing, and would make it impossible to implement holding limits,” it said.
The economic and sovereign credit implications of a digital euro are also expected to be modest, Moody’s said.
For instance, given the relative efficiency of existing payment systems, and the low share of the population that’s currently excluded from the traditional banking system, the development of a digital euro is unlikely to have much of an impact on household consumption.
While an official digital currency could marginally improve tax collection and reduce financial stability risks, the benefit won’t likely be material, it said.
At the same time, a digital euro could reduce the availability of deposit funding for banks, and would weigh on their revenues from payments — although it’s expected the currency would be designed to limit those effects too.
Ultimately, it will likely take a decade or more to evaluate the success of a digital euro, Moody’s said.
“Assuming the digital euro project moves ahead, it will not be possible to assess its success solely based on its immediate adoption, because the ECB is pursuing objectives that may materialize in the coming decade and even beyond,” it said.
“We think that the digital euro could have greater benefits if the payment environment changes — for example, if cash usage continues to decline or new forms of private money emerge,” it said.
In the meantime, the Bank of Canada’s current consultation runs until June 19. It has pledged to issue a report on the results later this year.