Contactless payments are increasingly being used even for small amounts. For this reason the European Central Bank is considering the introduction of a central bank digital currency (CBDC). A comprehensive report on the possibilities of the digital Euro appeared on Friday.
The European Central Bank is continuing its work on the digital Euro. Internal tests with a central bank digital currency (CBDC) are supposed to begin in the coming weeks. Additionally, a public survey of citizens and experts from the academic and financial sectors on the advantages and disadvantages will take place on October 12.
No definitive decision until mid-2021
On Friday, the European Central Bank (ECB) published a comprehensive report on the possible introduction of a digital Euro. The report by a working group reviews the pros and cons of a central bank digital currency. The ECB explains under which conditions the digital currency would be made possible and casts light on consumers’ advantages and disadvantages. The report states that while the digital Euro will pose challenges for the central bank, these can be addressed with appropriate strategies in the design of a digital currency.
A public consultation will be launched on October 12 to gather opinions from citizens, payment industry representatives, and academics. The European Central Bank will decide whether to launch the digital Euro project by around mid-2021.
The digital Euro
The digital Euro would be a digital, electronic form of the fiat currency. The digital currency would not replace cash but would rather complement it. In any case, the Eurosystem would continue to issue cash.
“The Euro belongs to Europeans. The ECB is the guardian of the common currency. People in Europe are increasingly paying, saving, and investing electronically. Our task is to ensure confidence in our currency. That is why we must ensure that the Euro is ready for the digital age. We should be prepared to introduce a digital Euro should the need arise.” – Christine Lagarde, President of the European Central Bank.
The potential impact of a digital Euro
Experts at the European Central Bank have already identified possible scenarios for the introduction of the digital currency. One could expect an increased demand for electronic means of payment in the European region and significantly lower cash payments. Other scenarios would be the introduction a worldwide, private means of payment (stablecoin), which could be questionable from a regulatory point of view and entail risks for financial stability and consumer protection. Another possible scenario would be the widespread use of digital currencies issued by central banks outside the Euro area.
According to the ECB, the Euro is a public good for the people. The introduction of the digital Euro would ensure that this good is preserved. But there will undoubtedly be challenges. However, with the right strategies in designing the digital currency, the Eurosystem can meet these challenges, according to the European Central Bank.
Not the first CBDC project
Internationally, this is not the first project involving a central bank digital currency (CBDC). The number of central banks working on CBDC projects has grown steadily over the past year. This dynamic has been advocated and supported by the Bank for International Settlements (BIS). According to a BIS survey earlier this year, 80% of central bank currencies are currently working on introducing a CBDC.
The People’s Bank of China (PBoC) has also been working for years on a digital yuan, which is definitely getting closer. In any case, the Chinese government is trying hard to issue the first CBDC, but which central bank will win this “race” is still unclear. More about the development of CBDCs can be found here.