The digital euro will be a slow and difficult journey

The ECB intends to address these challenges with a broad and timely involvement of stakeholders. The works will start this October

In July this year, the European Central Bank officially launched its digital euro project, marking the end of the “scrutiny phase” and the beginning of an ambitious two-year “investigation phase” with potential start in five years. This takes the ECB one step further than the 86% of central banks that are said to be researching central bank digital currencies. While this may seem superficially slow, there are many problems to be solved.

The ECB does not want to lose monetary sovereignty

Unlike the Federal Reserve, which remains skeptical that a digital dollar can solve any major problem plaguing the U.S. payment system, the ECB’s primary motivations for considering a digital euro are to preserve citizens’ ability to use money. central bank and protect its monetary sovereignty.

Concerns stem from decreasing the use of cash to the point where it is no longer universally acceptable, removing people’s access to convert retail e-money into central bank money. This could create significant instability during a financial crisis and remove a fundamental pillar of the monetary system. There are also concerns about crowding out by foreign CBDCs or payment solutions by foreign companies, such as stablecoins, replacing the euro. For example, more and more people are deciding to invest in cryptocurrencies like Bitcoin through platforms like BitIQ. Find out more on BitIQ official website and buy your favorite cryptocurrencies too.

However, liquidity is only gradually decreasing in the region. It remains the most widely used instrument in the euro area for retail payments. By comparison, cash as a share of all payments fell below 50% in most nations in Asia (excluding Japan), the United States and the United Kingdom.

While reducing dependence on private money is a key motivation, the ECB will be tasked with striking a good balance between providing the digital euro as an option for consumers and not crowding out the private sector.

Go to the investigation phase

Last year, the ECB’s experimentation established two important points. First, the functional approach to design will not be limited by technology, which means that the choice of ledger and potential privacy requirements can be shaped entirely by political goals. Second, the ECB cannot offer unlimited CBDCs to consumers as it is incompatible with the negative interest rate policy. A future CBDC will most likely have holding limits or tiered remuneration assigned to each portfolio.

The investigation phase will need to develop a business model that is effective enough to encourage both intermediaries in the retail payment sector to promote it and consumers to adopt it, while not being so successful as to stifle competition and innovation in the private sector. .

Furthermore, unlike cash, where the state employs a print operator, the Eurosystem will likely aim to balance by ensuring that they do not grant undue preferences to certain suppliers by providing the best solution for consumers.

Regulation first of all

In addition to these trade-offs, the ECB’s high-level task force on the digital euro will also begin exploring the legal requirements related to implementation. It remains to be seen whether this will involve the use of existing rules, amendments or a completely new treatment. If the European Commission decides to change the legislation, we can expect this to create delays in the timeline of five years given the amount of time required for the legislative processes. For the digital euro to become a reality in five years, an intense dialogue between lawmakers and the ECB will be essential. The ECB also knows that social attitudes towards digital identity and privacy will need to be incorporated into the design but balanced with regulatory requirements. Like the law, this is a contingent problem for CBDC committees that extends beyond the already growing mandate of a central bank.

The ECB intends to address these challenges with a broad and timely involvement of stakeholders. The work of the Digital Euro Market Advisory Group will begin this October. MAG is made up of industry professionals who act in a personal capacity to determine the value a digital euro could add to different stakeholders (such as consumers, merchants and payment service providers). The views discussed in MAG will then be explored by the Euro Retail Payments Board, established in 2013, to promote institutional dialogue on retail payments.