The European Central Bank’s (ECB) governing council has given the green light to a multi-year project to explore the creation of a digital version of the euro.
Today (14 July), the ECB announced its decision to launch an investigation phase into a central bank digital currency (CBDC) that will run for 24 months. A decision about whether or not to actually issue a digital euro will only come at a later stage but today’s announcement was widely expected given positive signals from senior ECB figures in recent months.
The investigation phase will focus on the functional design of the CBDC, involve focus groups, prototyping and conceptual work and will examine the use cases that a digital euro should provide. The Frankfurt-based institution plans to assess the possible impact on the market and identify design options to ‘ensure privacy and avoid risks for euro area citizens, intermediaries and the overall economy’.
The ECB repeated its promise that ‘a digital euro would not replace cash, but rather complement it’ in its press release. The stated objectives of such a currency are to offer a ‘riskless, accessible, and efficient form of digital central bank money’ while at the same time ‘helping to prevent illicit activities and avoiding any undesirable impact on financial stability and monetary policy’.
According to the ECB, the first phase would benefit from its own experimental work conducted together with the eurozone countries’ national central banks.
‘No major technical obstacles identified’
During the past nine months, the ECB has sought input from citizens and professionals, as well as having “conducted some experiments, with encouraging results,” said ECB president Christine Lagarde, adding: “All of this has led us to decide to move up a gear and start the digital euro project”.
Experiments were conducted in four areas: the digital euro ledger; privacy and anti-money laundering; limits on digital euro in circulation; end-user access while not connected to the internet and facilitating inclusiveness with appropriate devices. The ECB concluded that ‘no major technical obstacles were identified to any of the assessed design options’.
According to a ‘Digital euro experimentation scope and key learnings’ paper also published today, ‘one of the key questions addressed by the experiments was the extent to which the digital euro ledger could be limited by the technological choices in terms of performance and flexibility‘.
The ECB concluded that both the Eurosystem TARGET Instant Payment Settlement (TIPS) system and alternatives such as a blockchain-based platform were able to exceed the threshold of 10,000 transactions settled per second, which is an estimate based on the total number of cash and card retail transactions in the euro area per year (around 300 billion). The experiments also suggested that architectures combining centralised and decentralised elements are possible.
The ECB pointed out at the end of its statement how its experiments had shown that a digital euro core infrastructure would be environmentally friendly. ‘For the architectures that were tested, the power used to run tens of thousands of transactions per second is negligible compared with the energy consumption of crypto-assets such as bitcoin,’ it noted.
China’s rapid progress
A growing number of central banks, including the US Federal Reserve and Bank of England, are stepping up their explorations of digital money. The Bahamas last year became the first country to launch a fully deployed a digital version of a fiat currency: the ‘Sand Dollar’. In April this year, Eastern Caribbean nations rolled out blockchain-based digital currency ‘DCash’ within their currency union.
China is at an advanced stage of developing its CBDC, known as the e-CNY or ‘digital yuan’, and its officials’ pronouncements on the topic are watched closely given the country’s size and international significance.
China’s rapid progress has led to warning of risks to the preservation of the euro’s international role. On 29 June, the governor of the Banque de France (Bdf), François Villeroy de Galhau, identified “the progress made by extra-European CBDCs and notably by the digital yuan” as part of a ‘triangle of risks’ during a speech in Paris.
Villeroy de Galhau said he believes the development of China’s CBDC poses a threat to monetary sovereignty and that other countries must step up their efforts.
The BdF has been one of the highest-profile central banks in respect of CBDC experimentation. Just last week it announced that it had successfully completed a wholesale cross-border payment and settlement experiment using CBDC with the Monetary Authority of Singapore. The experiment, supported by JP Morgan’s Onyx blockchain unit, simulated cross-border transactions involving multiple CBDCs (m-CBDC) on a common network between France and Singapore.
Political and market engagement
Throughout the investigation phase announced today, the ECB intends to engage with European co-legislators on the necessity of changes the EU’s legislative framework.
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 in April to provide MEPs with an update on the topic.
“We will engage with the European Parliament and other European decision-makers and inform them regularly about our findings. Citizens, merchants and the payments industry will also be involved,” Panetta said today.
The ECB also announced the establishment of a new ‘Market Advisory Group (MAG)’ that would take account of the views of prospective users and distributors of a digital euro during the project’s investigation phase.
Views articulated in the MAG would be discussed in the Eurosystem’s established forum for institutional dialogue on retail payments: the Euro Retail Payments Board.
Green light follows Germany and BIS updates
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 39-page analysis. Forty-seven per cent of the responses came from Germany.
Last week, Germany’s banking industry’s largest association for the first time laid out its vision of the design of a digital euro, proposing the ECB widen the focus of its CBDC explorations to include further innovative forms of digital money.
The Bank for International Settlements (BIS) last month set out its recommended approach to fundamental elements of CBDC design, stating a preference for account-based systems built on digital ID. BIS’s verdict, set out in a chapter of its Annual Economic Report for 2021, said CBDCs would best function as part of a two-tier system where the central bank and the private sector ‘work together to do what each does well’. Specifically, the central bank would operate the system’s core, ensuring its safety and efficiency, while the private sector, such as banks and payment service providers, would innovate and actually serve customers.
Lagarde told Bloomberg TV earlier this year that a digital euro could come into being in about four years or “maybe a little more” after the governing council’s decision.
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‘German banks set out vision for digital euro design‘ – our news story (7 July 2021) on Germany’s banking industry’s largest association for the first time laying out its vision of the design of a digital euro, proposing the ECB widen the focus of its CBDC explorations to include further innovative forms of digital money
‘Account-based CBDCs built on digital ID are way forward: BIS‘ – our news story (23 June 2021) on the Bank for International Settlements setting out its recommended approach to fundamental elements of CBDC design, stating a preference for account-based systems built on digital ID
‘Sweden’s e-krona testing enters next phase‘ – our news story (2 June 2021) on Sweden’s central bank teaming up with one of the country’s biggest commercial banks and a Nordic IT services provider as its testing for a potential CBDC takes a step into the ‘real world’
‘Digital euro tech investigations would take two years: ECB’s Panetta’ – our news story (15 April 2021) reporting remarks made by Fabio Panetta to the European Parliament’s economic and monetary affairs committee
INTERESTED IN THE TECHNOLOGY BEHIND CBDCs? WATCH THIS =>
Global Government Fintech organised an international webinar, in partnership with Amazon Web Services Institute (AWSI), entitled ‘Delivering Central Bank Digital Currencies (CBDCs): Exploring the Technology Challenge’ on 22 April.