The Digital Euro and the Cryptocurrencies: Challenges and Perspectives

Introduction

In recent years, the increasing emergence of cryptocurrencies has influenced the global financial markets. This, along with economic insecurity and market exposures, has led the European Central Bank (ECB) to place the matter regarding the possible issuance of a Central Bank Digital Currency (CBDC) front and center. The ECB is examining the possibility of introducing the so-called digital euro, so there is a need to assess what the implications, economic and social, of such a choice might be, as well as the (very different) characteristics of cryptocurrencies.

Digital Euro: Possible Characteristics and Risks

The digital euro currency is institutionally different from cryptocurrencies. In fact, unlike the latter, the digital euro is designed to coexist with hard cash and has a central base, represented specifically by the Central Bank. Cryptocurrencies, on the other hand, express a trend toward decentralization of the financial system, linked to shadow banking practices and deviations from the traditional lending system. Furthermore, centralization, inclusiveness, security, and privacy are prominent in the analysis of the digital euro's possible nature. In particular:

• As for centralization, this concept must be correlated with the need for market stability and the trust of the European population in relation to transactions conducted with digital forms of currency.

• Moreover, for the digital euro to be widespread, inclusivity cannot be ignored. In fact, inclusivity impacts both the availability of the new instrument, which must also be guaranteed to individuals who do not have access to digital and information devices, and access to credit.

• Security, on the other hand, is relevant to implementing measures to prevent fraud and cyber-attacks. The effects of these could be much more impactful if a CBDC were to be successfully introduced in Europe.

• Finally, the proper balance between protecting users' privacy and personal data and the necessary prevention of crimes (including those related to money laundering) should gain crucial importance within the considerations relating to the digital euro.

• The risk that the CBDC may somehow undermine or disregard the needs of consumer protection and market stability is high, especially considering the probable competition between the CBDC itself and cryptocurrencies, which, being subject to more flexible regulation, may still be able to maintain the market share they have gained in recent times.

A Comparison between CBDCs and Cryptocurrencies

As anticipated, to understand the characteristics of the digital euro, it is useful to compare it with cryptocurrencies. While cryptocurrencies represent a means of payment and/or investment, they do not qualify as real currencies, as they do not have legal tender status. The first major element concerns the centralized nature of a currency issued by a central bank. This makes cryptocurrencies characterized as decentralized as they are untethered from a banking system. Centralization, in any case, would be absolutely positive from the point of view of currency stability and consumer confidence.

Currency stability, on the other hand, is an important corollary. Cryptocurrencies’ volatility has made them particularly difficult to handle, and their use has been impacted. Tying virtual currency to cash, on the other hand, would allow for a CBDC equivalent to the physical currency, enabling an increasingly frequent and inclusive use. For the reasons above, the digital euro would likely be accepted throughout the euro area, facilitating regular transactions. Instead, cryptocurrencies, despite their growth, are still far from being widely accepted. However, cryptocurrencies offer unique advantages, such as the possibility of quasi- anonymous transactions. Such anonymity may not be granted in implementing the digital euro since, as discussed above, the trade-off between the various interests at stake could lead the European institutions to introduce a digital currency subject to stringent supervision regarding transactions. A final aspect, closely related to the verification of transactions, concerns the technology used by digital currencies. Cryptocurrencies, such as Bitcoin or Ethereum, use instruments such as blockchain to ensure transparency, security, and accessibility. The digital euro could use similar technology but with adjustments. Indeed, the choice of technology will significantly impact aspects such as scalability, transactional speed, and security.

Economic and Social Aspects

The introduction of a digital euro could have economic and social implications and consequences. A CBDC could improve payment efficiency, reduce transactional costs, and promote financial inclusion.

On the other hand, potential risks related to its implementation could arise. The adoption of a digital euro may impact the role of commercial banks, as customers might wish to hold their private wealth in digital currency rather than in bank deposits. This could lead to a decrease in banks’ lending ability, leading to a weakening of the banking sector, with precise repercussions on the competitiveness of the European market vis-à-vis other global players, such as the United States and China.

Conclusions

The digital euro represents a significant step forward in the evolution of the European financial system. The currency would offer important benefits regarding stability and efficiency, but balancing these benefits with the possible challenges is crucial. The digital euro would likely offer a more secure and stable alternative to hard cash, but it raises issues regarding centralization, privacy, and the role of commercial banks. The success of the digital euro will depend on the ECB’s ability to design a system that reaches an equilibrium between pros and cons and places the Eurozone in the condition of continue engaging in the financial arena.

Luca Vernero is a Corporation Law LL.M. graduate at NYU School of Law, a Graduate Editor for

the NYU Journal of Law & Business and a current Ph.D. candidate in Corporate Law at the University of Turin. Prior to attending law school in New York City, Luca worked as a lawyer in an Italian boutique law firm, being involved in corporate litigation as well as corporate arbitration proceedings.