China’s Digital Yuan Is Key Risk for Euro, ECB’s Villeroy Says

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China's rapid progress in developing a digital yuan poses a key risk in preserving the euro's international role, said European Central Bank Governing Council member Francois Villeroy de Galhau.

The Bank of France governor urged policy makers in Europe to act quickly on their own equivalent efforts and more innovative payment solutions, “or risk an erosion of our monetary sovereignty -- something we cannot tolerate.”

Villeroy identified “the progress made by extra-European CBDCs and notably by the digital yuan” as part of a “triangle of risks” challenging the ECB's control over payments. He also highlighted the declining use of cash and the rise of crypto-assets.

“The risk is clearly that Europe will lose momentum not just in its drive to strengthen the international role of the euro, but even in preserving it,” he said at an event in Paris on Tuesday. “The challenge here is also a geopolitical concern.”

China's plan to create a digital version of the yuan has drawn scrutiny from governments and central banks alike, with U.S. President Joe Biden's administration studying its potential threat to the dollar. The People's Bank of China has tried to allay fears by saying its goal is not to replace currencies, and that its efforts are aimed at domestic use.

The ECB is among central banks taking the fastest steps with their own such efforts, though it won't officially decide until July whether to move forward with practical experiments. While its researchers have warned over taking longer than other monetary authorities, President Christine Lagarde has said the project may take about four years.

Villeroy argued in his remarks that the ECB must study both retail uses as well as “wholesale” or “interbank” forms of any potential digital euro, as the latter would be vital to cross-border transactions.