Autumn on the European money market has sparked discussion on digital money. The rapid development and use of digital technology increased the volume of online/e-payments due to COVID-19, but also competition coming from digital currencies developed by other central banks, such as the Chinese central bank, from cryptocurrencies and digital currencies developed by tech giants, are some of the reasons that spurred the European Central Bank (ECB) i.e. Eurosystem to publish the Report on a digital euro. The Report analyses potential options and conditions under which the digital euro could operate, reflecting clear caution from its introduction as a means of payment, mainly concerning the monetary policy of the ECB and the EU financial market. Will the digital euro be available in Serbia and will it find favor with the public? What impact will it have on the domestic money market? Will it cause fresh headaches for the National Bank of Serbia and commercial banks?
The Report views the digital euro mainly as a means of payment, just another form of euro to be used in tandem with euro paper money. It would not be a new currency. The idea is for it to be made available throughout the EU Member States, and to a certain extent and under specific conditions, to users outside the EU. Depending on the accepted scenario i.e. model, the use of a digital euro outside the EU may be prohibited or limited to certain groups or categories of persons or to use only during stays in the EU. The idea behind this safeguard mechanism is to prevent disturbances in capital movement and the balance of the EU’s international payments, and to facilitate ECB monetary policy management, efforts to counter money laundering and the financing of terrorism, as well as to shield weaker currencies of other countries, thereby avoiding political tensions. Eurosystem is aware that a digital euro might be more than just a means of payment i.e. it would be a means of capital investment but at the same time open to abuse in and outside the EU, wherein the latter case the ECB has no effective control and supervision.
If the fluctuation of a digital euro in Serbia was minor and/or came with a multitude of usage eligibility conditions attached, there would likely be little interest in this means of payment in Serbia. However, a digital euro might prove enticing as a means of investment. As a low-risk ECB product, it would enjoy significant confidence. Consequently, due to its availability in digital and paper form, a separate digital euro market might emerge, which might see the digital euro gain significant value over the paper euro and the Serbian dinar too. And that is quite the opposite of what Eurosystem had in mind. Furthermore, depending on the conditions, where it is held and the income it could generate, citizens of Serbia might be induced to invest in digital euro, moving their capital outside Serbia. Depending on the medium of its use, with an offline option and without sufficient identification of the payer or payee, digital euro in Serbia might be used as a tool for legalizing suspicious capital. It should be noted that digital forms of currencies issued by central banks as a means of payment (exactly what the digital euro is) are not the focus of the Digital Property Bill.
The National Bank of Serbia, as the main pillar of monetary policy, should go a step further than the final model of digital euro chosen by ECB in order to prevent potential distortions on money and capital markets. The digital euro might pose a new challenge to confidence in the domestic currency, requiring interventions on the foreign exchange market. Foreign exchange regulations should set the conditions for the use of digital euro, as additional support to the balance of payments and foreign exchange market, but also to potential capital outflow due to investments in digital euro outside Serbia. Potential capital outflow due to digital euro, in the form of deposit withdrawals, may require the NBS to step in and provide additional support to commercial banks (say, by adjusting mandatory reserves or through additional loans to commercial banks under favorable terms). From the aspect of money laundering, commercial banks would have to adjust their KYC procedures and transaction flows, as well as IT security, since the euro in digital form is susceptible to cyber fraud and attacks. At the end of the day, effective cooperation and information exchange between the ECB and the NBS would help control and solving any drawbacks to the use of the digital euro in Serbia.
In setting the foundations for the digital euro, the European Central Bank, i.e. Eurosystem, has set itself an ambitious task – to make it an international and competitive digital currency as means of payment, while preserving the stability of EU’s financial system, with potential limits to its use outside the EU or to its use by non-EU citizens. The Digital euro should enjoy great confidence due to its low risk, making it an enticing option for citizens of Serbia, as an investment. Since the ECB shall not have effective control of the digital euro’s fate outside the eurozone i.e. EU borders, the NBS would have to carefully monitor the development of the digital euro, in order to timely react to any adverse effects on the domestic currency and capital markets. Once the ECB settles on a final model and usage eligibility criteria for the digital euro, Serbia’s regulators have to follow suit and find an appropriate framework to manage the digital euro.
Author: Miodrag Jevtić
