The latest report from the European Central Bank predicts that the digital euro will replace a portion of the banknotes in circulation, fundamentally reshaping how Europeans use money. Bank deposits will also be impacted.
Digital Euro to Reshape How Europeans Use Banknotes and Bank Deposits
While the digital euro, the project that seeks to implement a European central bank digital currency (CBDC), has yet to be approved, the European Central Bank (ECB) is already studying its effects on the current composition of assets, including banknotes and bank deposits, in the Eurozone.
The latest report from the bank indicates that the upcoming issuance of the digital euro can reshape how Europeans use money, substituting for currently used forms of money.
The bank estimates that the digital euro has the potential to substitute 5 of every 10 euros issued in physical banknotes from circulation. In the same way, the same study predicts that for each 10 digital euros issued, 3 will be removed from bank deposits.
The total impact of the digital euro was studied in three different cases, depending on the adoption and reception of the citizens. If the adoption remains low, 15 billion euros in banknotes would be substituted. If the reception gets to its highest level, 125.000 billion euros in banknotes would be taken out of the market.
Finally, if the adoption reaches its highest level, the bank predicts that the digital euro would substitute 256 billion euros in banknotes.
Nonetheless, even in the best reception prediction, the digital euro would still be used marginally, as over 1.56 trillion euros are currently issued in banknotes.
Unlike the U.S., which recently opposed the issuance of a dollar CBDC, Europe has been promoting the issuance of the digital euro to counter the rising relevance of dollar stablecoins and other cryptocurrencies.
In January, ECB board member Piero Cipollone stated that the digital euro would serve as a stopgap for the rise of these bankless solutions. “That’s why we need a digital euro,” he stressed.
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