European Central Bank (ECB) executive board member Fabio Panetta warned on Monday of the negative consequences of leaving digital payment services in private hands alone and advocated issuing a digital euro backed and regulated by the eurozone issuer.
“The opposite of not issuing the digital euro is not that everything stays the same. There will be other players entering the European market providing their own digital means of payment with potentially very broad and negative consequences on dimensions such as privacy, sovereignty, financial stability,” he told the European Parliament’s Economic Affairs Committee.
Panetta, who appeared to report on the ECB’s progress towards the possible creation of digital euro, said the institution will report in October on the results of the research phase, which started in 2021, so that the governing council can decide whether to launch the next phase, although the final decision on whether to issue the digital currency will not be taken yet.
During the hearing, the Italian economist insisted that the risks of not issuing a digital euro are “greater” than those of doing so since other private actors would be in charge of providing digital means of payment, such as stable coins or cryptocurrencies, but would not have the same incentives as public authorities to protect financial stability or users’ privacy.
The ECB fears a strong impact of the digital euro on the financial system if it falls exclusively into private hands.
“In the absence of a digital euro, the emergence of potentially dominant private players in the digital payments market could have a strong impact on the financial sector,” added Panetta, who highlighted the role of large technology companies.
As an example, he cited the recent decision by US payment provider PayPal to launch its own stable dollar-denominated currency for digital payments.
Panetta stressed that the aim of these private providers is to increase their market share, so they have no incentive to limit the use of their currencies and services or to make them compatible with existing ones, while the ECB would pay attention to the effect of the digital euro on financial institutions.
“While market entry by ‘big tech’ or other large payment providers could promote innovation initially, competition could be severely harmed if they achieve a monopoly position as we have seen in other digital sectors,” he said.
Opportunity for European financial firms
Panetta pointed out that currently “two thirds” of the European cashless payments market is in the hands of foreign companies and he saw the introduction of the digital euro as an opportunity for European banks to gain ground.
As opposed to private models, the digital euro would be introduced by public authorities, regulated at European level and distributed by banks in such a way that they would maintain their relationship with customers, with the intention of making it compatible with existing means of payment, he explained.
In addition, it could be used offline, which would provide privacy guarantees equivalent to cash, and would be free of charge for the end-user.
“Payments are an essential service (…) We should not leave it to the private sector alone, including the big tech companies, to provide such services,” he said.