•  The European Central Bank (ECB), which is working on the implementation of the digital euro under pressure from US President Donald Trump's monetary plans with crypto-assets, believes that the implementation of this digital currency will lead to the withdrawal of 5 out of every 10 physical euros in circulation.

• This is the main conclusion of the agency's latest report, which, unlike other central banks such as the US Federal Reserve (Fed), has been working for years to implement this means of payment.

The Fed has already pledged not to develop a digital dollar after President Trump signed an executive order promoting cryptocurrencies and seeking to make the country the world leader in digital assets, while prohibiting the establishment of a central bank digital currency (CBDC).

The ECB is going the other way, as emphasised this week by executive board member Piero Cipollone, who defends the project as a matter of strategic sovereignty and envisages the digital euro as a new monetary liability, in addition to banknotes and commercial bank reserves, which would not necessarily add to the central banks' balance sheets.

The effects of issuing digital currencies will depend not only on how they are designed, but also on whether they are attractive to consumers, for which central banks need to work on remuneration, holding limits or access criteria.

The net impact of digitisation on the size of balance sheets, the report notes, could also be negative, as the number of banknotes in circulation could decrease and the design features of CBDCs (Central Bank Digital Currency, which translates as Central Bank Digital Currency, the digital euro in the case of the euro area) could limit their adoption as a store of value.

This implies that the balance sheet would not change, but rather be a ‘substitution’ of some assets for others, as the demand for the digital euro will lead to a fall in banknotes in circulation and bank deposits, together with an increase in the assets on the ECB's balance sheet in other ways.

The actual amount of CBDCs in circulation in the euro area will be determined by household demand, just as household demand determines the amount of banknotes in circulation.

On this assumption, the ECB calculates that for every 10 digital euros issued, 5 physical euros will be withdrawn from circulation and bank deposits would lose 3 euros.

The ECB has taken into account three possible scenarios, depending on whether demand is low, medium or high: in the first case, the fall in banknotes would be 15 billion; in the second, 125 billion; and in the third, 256 billion.

The ECB's calculation also includes coins, which are quantitatively much less relevant than banknotes. In December 2023, there were 1,567.2 billion euros in banknotes and 33.5 billion euros in euro-denominated coins in circulation, according to the ECB's own statistics.

Counterfeit digital euros?

The main risks of adopting the digital euro include reputational risks and those arising from the new currency's dependence on infrastructure and facilities that are highly susceptible to cyber-attacks.

In this regard, the report recalls that the Bank for International Settlements has launched the "Polaris Project" to support central banks in the design, implementation and operation of secure and resilient CBDC systems, to "mitigate the operational, legal and reputational risks they face due to cyber threats or operational failures".

Source: El Economista