The European Central Bank advanced its efforts on Wednesday to introduce a digital euro, enabling individuals in the 20 eurozone nations to securely and cost-effectively conduct electronic transactions.
The ECB announced the commencement of a two-year “preparation phase” for the digital euro, beginning on November 1. During this phase, the ECB will finalize regulations, select private-sector collaborators, and conduct testing and experimentation.
The European Central Bank stated that, after the initial two-year phase, the Governing Council will determine whether to progress to the subsequent stage of preparations, which could lead to the eventual introduction of a digital euro.
While this decision represents a modest advancement in a lengthy project, it positions the ECB ahead of the central banks of the other Group of Seven (G7) advanced economies and could potentially serve as a model for others to emulate.
Several Caribbean nations and Nigeria have already introduced digital currencies, and China and Sweden have initiated pilot initiatives. However, the Federal Reserve, the Bank of England, and the Bank of Canada have all approached such endeavors more conservatively.
The digital euro will function much like a typical online wallet or bank account, with the notable distinction of being free to use and backed by the ECB, rather than being reliant on a private enterprise, rendering it more secure.
However, there are critics of the digital euro project, primarily including bankers and regulators who are concerned that it may draw deposits away from the commercial sector. These critics also encompass some academics, the European Union’s privacy watchdog, and certain consumer groups.
Markus Ferber, a German member of the European Parliament representing the conservative European People’s Party, stated, “So far, the ECB has not been able to clearly communicate the added value of the digital euro.”
One significant concern is that a digital currency could potentially lead to bank runs during times of crisis, offering little improvement over existing accounts.
The ECB asserts that the digital euro will introduce competition in the payment market, which is currently dominated by U.S. credit card companies.
To address worries about depleting commercial banks, the ECB has announced its intention to establish a cap on the amount of digital euros an individual can possess, likely around 3,000 euros.
The International Monetary Fund recently stated that digital currencies should have a modest impact on monetary policy outside of crisis situations and issued a guide for central banks on how to implement them.
Similar to physical cash, users will be able to make small offline payments with digital euros to nearby parties, and the ECB has stated that it won’t retain any data about individual transactions.
The distribution of the digital euro will be carried out by the ECB, commercial banks, and digital wallet providers. It will only be accessible to residents of the euro area and its citizens abroad, mitigating concerns about widespread adoption in countries with weaker local currencies.
According to European Commission data, electronic payments in the EU increased from 184.2 trillion euros ($201.7 trillion) in 2017 to 240 trillion euros in 2021, with a boost attributed to the COVID-19 pandemic.
A survey by the Bank for International Settlements suggests that central banks representing approximately one-fifth of the world’s population are likely to introduce their own digital currencies within the next three years.
Many of these projects gained momentum around 2019 when Facebook announced its plans to launch a digital currency, which were subsequently abandoned.
However, the emergence of stablecoins – crypto tokens partially backed by traditional currencies – provided renewed momentum to central bank digital currencies, or CBDCs, in financial terminology.
Reported by Francesco Canepa; Edited by Alex Richardson and Deborah Kyvrikosaios.