The European Central Bank (ECB) has announced that it will decide whether to progress a potential ‘digital euro project’ by mid-2021, stating “we need to be ready”.
The ECB has also confirmed that a public consultation on the potential digital euro will launch on 12 October and that ‘experimentation’ will start in parallel.
Plans for the consultation were announced last month by president Christine Lagarde at a conference at which she said that launching a digital euro would put the Eurosystem, the eurozone’s monetary authority, “at the cutting-edge of innovation”. Addressing last month’s ‘Banking and Payments in the Digital World’ event, organised by the Deutsche Bundesbank, Lagarde emphasised that the Eurosystem had “so far not made a decision on whether to introduce a digital euro” – a message reiterated as the ECB presented its ‘Report on a digital euro’ on 2 October.
Scenarios that would switch lights from amber to green
The ECB’s report, which was compiled by a high-level taskforce on central bank digital currency (CBDC) that brings together experts from the ECB and 19 central banks of the euro area, lays out over 55 pages the latest thinking from the Frankfurt-based institution, including legal and design considerations.
The ECB confirmed last year that it was investigating how a European public digital currency could work and whether it would be desirable. Its work mirrors how most central banks, as well as major tech companies, most prominently Facebook, explore the potential for launching their own digital currencies. China is widely seen as leading the way in respect of CBDCs.
In its report the ECB identifies potential scenarios that would require the issuance of a digital euro. These include ‘an increased demand for electronic payments in the euro area that would require a European risk-free digital means of payment’; a ‘significant’ decline in cash use in the eurozone; the launch of global private means of payment that ‘might raise regulatory concerns and pose risks for financial stability and consumer protection’; and a ‘broad’ take-up of CBDCs issued by foreign central banks. A digital euro would be introduced alongside cash – it would not replace it.
A digital euro would ‘preserve the public good that the euro provides to citizens: free access to a simple, universally accepted, risk-free and trusted means of payment’, the ECB says. It also says that a digital euro ‘also poses challenges, but by following appropriate strategies in the design of the digital euro the Eurosystem can address these’.
In respect of its planned experimentation, the report says that the high-level taskforce on CBDC will ‘co-ordinate’ to ensure that Eurosystem resources are ‘leveraged efficiently’. It says: ‘To ensure that meaningful answers are obtained to the open questions raised in this report, towards mid-2021 the Eurosystem will decide whether to launch a digital euro project, which would start with an investigation phase’.
“Europeans are increasingly turning to digital in the ways they spend, save and invest. Our role is to secure trust in money. This means making sure the euro is fit for the digital age. We should be prepared to issue a digital euro, should the need arise,” said Lagarde.
“Technology and innovation are changing the way we consume, work and relate to each other,” said Fabio Panetta, the former senior deputy governor of the Banca d’Italia who is chair of the CBDC taskforce and also a member of the ECB’s executive board. “A digital euro would support Europe’s drive towards continued innovation. It would also contribute to its financial sovereignty and strengthen the international role of the euro.”
Potential cost and environmental savings
The ECB says that a digital euro could specifically ‘promote innovation in the field of retail payments, complementing private payment solutions’ and increase competition and accessibility with regard to digital payments, supporting financial inclusion. It could also, the ECB says, ‘represent an option’ for cutting the costs and ecological footprint of monetary and payment systems.
In a further related development, the ECB has applied to trademark the term ‘digital euro’, according to a report by the news agency Bloomberg. The application was filed on 22 September by the ECB’s legal representatives, Frankfurt-based law firm Bock Legal, according to the website of the European Union Intellectual Property Office.
The European Commission has just adopted a new digital finance package, containing – for the first time – legislative proposals on crypto-assets and digital operational resilience. “The future of finance is digital,” said the Commission’s executive vice-president for an economy that works for people, Valdis Dombrovskis, when presenting the plans.