Technological investigation and experimentation would be the European Central Bank (ECB)’s ‘main preoccupation’ for two years should the bank embark on further and deeper explorations into the possibilities of a potential digital euro, one of its top executives has said.
Fabio Panetta, a member of the ECB’s executive board and chair of its taskforce on a digital euro, faced the European Parliament’s economic and monetary affairs committee yesterday (14 April) to provide MEPs with an update on the prospect of a European central bank digital currency (CBDC) and summarise the results of the bank’s recent public consultation on the high-profile topic.
The ECB’s governing council is due to decide in the middle of this year whether to green light ‘formal investigations’ into the possible issuance of a digital euro. Should its members give the nod, which seems likely, focus would intensify on the technological options.
“We have been in contact with the technology companies from all European and non-European countries to understand what the best technology is,” Panetta informed the parliamentarians.
“We will experiment with those different technologies during the next investigation phase, the phase that we will start – in the case of a positive decision by the governing council – in fall [autumn] 2021. This would be our main preoccupation in the next two years,” he said.
‘Examining all technologies’
In initial scripted remarks entitled ‘A digital euro to meet the expectations of Europeans’ ahead of questions from the MEPs, Panetta said the potential two-year tech-focused experimentation would see the ECB “carefully analyse possible design options and user requirements as well as the conditions under which financial intermediaries could provide front-end services built on a digital euro.”
“At the end of the investigation, the [ECB] governing council would take a decision on the design and on whether to move to the implementation of user requirements,” he explained by video-link. “This phase, which would take several years, would see the development of integrated services, testing and possible live experimentation of a digital euro. Only at the end of this process would the governing council be able to decide whether or not to launch a digital euro.”
The former senior deputy governor of the Banca d’Italia went on to tell MEPs during the Q&A: “We are currently experimenting with some of these technologies: centralised technologies or decentralised technologies based on distributed ledgers; technologies for offline payments based on specific features of physical devices. There are technologies that can potentially be adopted to support a digital euro. We are examining all of them – there is no decision yet.”
Digital euro would ‘increase privacy’
The ECB announced in January that its digital euro consultation had received 8,221 responses – more than any previous ECB public consultation – with privacy of payments, security and pan-European reach, respectively, ranked as a digital euro’s most important features. ‘No additional costs’ and offline usability rank fourth and fifth as respondents’ further priority features, according to a newly published 39-page analysis.
Panetta addressed the issue of privacy in his opening remarks, saying that a digital euro “would, in fact, increase privacy” for those making digital payments.
“As a public and independent institution, the ECB has no interest in monetising or even collecting users’ payment data,” he told the MEPs. “A digital euro would therefore allow people to make payments without sharing their data with third parties, other than what is required by regulation. This differs from private payments, where services are generally offered in exchange for personal data that are then used for commercial purposes.”
He said that, in the context of ‘electronic and large-value transactions’, details should be available to intermediaries “but privacy-enhancing techniques could still ensure a high level of privacy”. He then shared more specifics, saying: “For example, the identity of users could be kept separate from payment data, allowing only financial intelligence units to obtain this information and identify the payer and payee when suspicious activity is detected.”
He added: “Our preliminary experimentation on a digital euro is showing promising results on how technology can be used to protect user privacy without relaxing standards against illicit activities.”
Panetta received about 10 questions from MEPs across a variety of areas.
On the topic of whether a digital euro risked ‘crowding out’ private payment providers, Panetta said “quite the opposite”, proposing that the private sector should be able to build innovative services on top of the digital euro’s payments scaffolding. “For example, programmability could be a feature of products that could be built on top of a digital euro,” he said.
Ondřej Kovařík, a Czech MEP from the Renew Europe political group, reacted positively to this possibility, saying: “I think an entire new business ecosystem can be developed, based on the introduction of a digital euro.”
In respect of the speed at which the ECB is exploring a potential digital euro, Panetta pointed out that China – seen as the global CBDC frontrunner among major nations – started its analysis into CBDC in 2013, whereas the ECB embarked on its journey about six years later. “We will try to be as rapid as possible, but this is a major and historical change,” he said, also pointing out that Sweden, seen as a relative frontrunner within Europe with its explorations of a potential e-krona, has only in the past fortnight issued a report entitled ‘E-krona pilot Phase 1’, despite starting its CBDC explorations in 2017.
The Frankfurt-based ECB’s president, Christine Lagarde, recently told Bloomberg TV that a digital euro could come into being in about four years or “maybe a little more” after the governing council’s decision in a couple of months’ time.
Of the 8,221 responses to the ECB’s consultation, 47 per cent came from Germany, 15 per cent from Italy and 11 per cent from France.
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‘Delivering Central Bank Digital Currencies (CBDCs): Exploring the Technology Challenge’ – a Global Government Fintech webinar, supported by our knowledge partner Amazon Web Services, on 22 April 2021