• Crypto & Funx
• 30 Jun, 2024

A potential dispute is brewing between the European Central Bank and EU member states regarding the regulation and control of the upcoming digital euro.

Both sides are fighting to have power over the digital currency.

One suggested solution is to let legislators set guidelines for the ECB’s operations, while the final decision-making power remains with the bank.

A significant conflict is brewing between the European Central Bank (ECB) and several European Union governments regarding the upcoming digital euro, a new monetary tool designed to modernize payment systems across the continent.

On October 29, Politico that both the bank and governments recognize the potential risks of mismanagement threatening the stability of Europe’s banking system. However, they disagree on the limits of how much digital currency individuals can hold in ECB-backed “wallets”.

Frankfurt Supports ECB to Oversee the Digital Euro

The digital euro, which has been in development since 2021, aims to serve as a virtual counterpart to traditional euro coins and banknotes, providing a unified payment solution to compete with giants like and .

During a closed-door meeting, EU leaders from France and Germany expressed concerns about the ECB potentially overreaching in regulating the digital currency. While some view this resistance as necessary, ECB officials see it as unwarranted political interference.

Despite the ECB’s assertion that ensuring banks’ soundness is part of its supervisory role, many member states argue that legislative bodies should define these responsibilities. They worry that allowing the ECB to set digital currency limits could grant it disproportionate influence over a tool significantly affecting banking stability.

However, Frankfurt aligns with the bank, supported by the European Commission. They contend that allowing governments to set limits could subject the ECB to political pressures that might harm financial stability, with fears that politicians could yield to public demands, jeopardizing banks’ health. Interestingly, many bankers have sided with the ECB after it introduced protective measures for their interests.

Frankfurt insists that allowing the ECB to control digital currency aligns with its vision of maintaining European monetary sovereignty. ECB officials maintain that they alone should manage the money supply, essential for effective monetary policy. Nevertheless, at least nine EU countries disagree.

More Support for the ECB

In addition to Frankfurt, Professor Stephen Cecchetti from Brandeis International Business School supports the central bank controlling the digital currency. He argues that while the digital euro serves as a vital payment infrastructure, limits on holdings should be set by the ECB’s Governing Council, similar to existing currency regulations.

Despite their stance, EU member states continue to push for influence over the asset’s regulation. One proposed compromise suggests that while legislators set parameters for the ECB’s operations, the final decision would remain with the central bank.

However, this compromise may not alleviate broader concerns that a project intended to enhance Europe’s economic independence could evolve into a new risk if the ECB proceeds without sufficient democratic backing.