It’s currency wars, version 2.0. Between bitcoin and Libra, renamed Diem, central banks want to keep their monopoly. The ECB works on digital euro. Switzerland is making progress.
Imagine for a moment that you could have a euro account directly with the European Central Bank (ECB), perhaps even with an interest rate? This digital euro or digital euro would form the ultimate form of currency, the most secure, as it is deposited at source, with the organization that prints the banknotes and monetary policy management. What would become of the commercial banks where we all still have deposits? Do banks disappear from the landscape?
We’re not there yet. But the ECB is really working on creating a digital euro. And she’s not the only one. From Sweden to China through Switzerland, we think about it. The Swiss National Bank even announced on Thursday that it had completed a feasibility study of such a currency in collaboration with the Bank for International Settlements (BIS), a “central bank bank”. However, the project called Helvetia is not about the individual, at least initially.
The pandemic has further increased the appeal of digital payments, including contactless payments.
There is no doubt that the first central bank to operate such a digital currency will enjoy a competitive advantage. Because let’s face it, central banks also compete with each other, their currencies compete. However, the publishing organizations share a common desire: they want to keep their financial monopoly at all costs. This is why they are taking a small look at the renewed interest in bitcoin. The latter, which presents itself as a bulwark against the printing press used too often by central banks, flirts again with $ 20,000. Above all, it has succeeded in attracting large investors. Even famous managers like Stanley Druckenmiller, Soros’s former right-hander, and Paul Tudor Jones have succumbed to the sirens of this cryptocurrency. But bitcoin, which retains a highly speculative flavor, is probably not the most risky asset in the eyes of publishing organizations. Most criticized is Libra, the currency announced in 2019 by Facebook.. Because here we’re potentially talking about nearly 3 billion potential users. Critics have been so enraged by regulators (fears about financial system stability, money laundering risks, etc.) that the early partners, Visa, PayPal and Mastercard, left the ship in a hurry.
This week, the Libra society, which is piloting the project, announced its name change to “Diem”. The project, which brings together companies like Spotify, Uber, Lyft, Iliad and Coinbase, has essentially revised its downward ambitions, taking into account regulators’ comments. Society counts soon launch “stablecoin”, a currency linked to another asset, in this case the dollar.
The pressure on central banks is not going to ease. The pandemic has further increased the appeal of digital payments, including contactless payments, even if the figures show that citizens are still pricing their money. This is why on the side of the European Central Bank, Christine Lagarde and Fabio Panetta argue that digital euro would exist alongside cash.
The ECB has not yet officially decided to launch such a digital euro. In a report, it also highlights the risks to financial stability. Because let’s imagine a new banking crisis like in 2008. Savers would soon have to leave their traditional bank accounts to switch to digital (safer) euros with the ECB. A type of large digital “bank run” that can create real chaos.
So the questions remain numerous. Could the ECB go over the banks and offer accounts to individuals? Should these deposits with the ECB be limited in size? Should they have an interest rate? The answers to these questions will shape the financial landscape for decades to come.