European Central Bank is warning other central banks about the risks of not offering a digital currency in its latest report titled “The international role of the euro.”

The “central bank digital currency and global currencies” section of the report written by Massimo Ferrari and Arnaud Mehl calls for attention to be paid to the risks to stability that might arise if a central bank does not offer a digital currency.

Besides a decline in cash, one such concern could be a situation in which domestic and cross-border payments are dominated by non-domestic providers such as foreign tech giants potentially offering artificial currencies in the future.

While not name-calling, this could very well be pointed to Facebook’s stablecoin Diem, which has been facing regulatory challenges all over the world.

According to the ECB, this can threaten the stability of the financial system. The ability of central banks to fulfill their monetary policy mandate and role as lender of last resort would also be affected, it added.

Additionally, individuals and merchants would be vulnerable to a small number of dominant providers with strong market power. It said,

“Issuing a CBDC would help to maintain the autonomy of domestic payment systems and the international use of a currency in a digital world.”

Digital means of payment offer safety, low transaction costs, and bundling effects that could ease international adoption of a currency, read the report.

These features can create positive feedback loops in the use of a currency as a means of payment and as a store of value and have effects on its global appeal as well, it said.

The report further lays out why CBDC matters for international currency status. Besides digitization easing its adoption, the global appeal of a currency depends on fundamental economic forces, which digitalization is unlikely to alter.

Availability of a CBDC could also facilitate currency substitution in third countries with unstable currencies and weak fundamentals, they wrote. This may facilitate digital “dollarization” in such countries, replacing their currencies with CBDC for local payments.

This would strengthen the global status of the currency CBDC is denominated in and reduce monetary policy autonomy in the economies concerned.

When it comes to specific design features of a CBDC, the report mentions interoperability of the CBDC with non-domestic payment systems, user anonymity, potential restrictions on use by non-residents, CBDC’s remuneration, and underlying transfer/settlement mechanism.

These features would have implications for its global outreach and ultimately the international role of the currency in which it is denominated by influencing the ability and incentives of non-residents to use it as a means of payment, unit of account, and/or store of value, said the report.

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