Like most central banks around the world, the European Central Bank (ECB) is considering a central bank digital currency.
Following public consultation and pilot work with national central banks in the euro area in 2021, the ECB is currently exploring the optimal design of a digital euro.
Whatever the final structure, a digital euro would complement cash payments by providing a digital alternative.
This has implications for everyone. Above all, if adopted, a digital euro would represent a sea change in cross-border payments, making international money transfers faster, cheaper and more transparent. The existing global payment system includes non-transparent and costly chains of transactions between correspondent banks.
An interoperable settlement structure should eliminate the need for such correspondent banking relationships for cross-border transactions.
Furthermore, responding to the growing preference of individuals and businesses for digital payments, it would serve as an alternative means of payment for retail transactions.
This would lead to structural changes in the sector, reducing the fragmentation of the European retail payments market. It goes without saying that the adoption of a digital euro could also promote competition and further encourage financial innovation.
While a digital euro would be convertible 1 to 1 with banknotes, it should not completely replace the physical euro.
The ECB states that it would only be designed as an alternative means of payment for common everyday retail transactions and not as an instrument for financial investments.
As a result, the attention of policy makers currently remains on the potential implications for retail.
The intention is to introduce a digital euro as a means through the introduction of a unique “one-stop-shop” solution. This would provide a universally accepted and secure solution that facilitates contactless and instant payments.
Despite its limited scope of intended general use, the implementation of the digital euro will undoubtedly be a complex and arduous process with multiple challenges.
Full of challenges
For example, recent research by the ECB indicated that safety and security were the main concerns.
This means that, at the very least, strong measures would be needed against fraud and hacking, as well as secure and reliable payment authentication methods such as biometric payment verification methods.
From a technical perspective, decision makers are experimenting with different approaches and technologies, including “centralized” and “decentralized” solutions.
It is also understood that two versions are currently under consideration in the Eurozone: an “online version”, which would allow payments to be processed by a third party, and an “offline version”, in which payments would be made directly from person to person.
Technical challenges aside, adopting a digital euro would require a European Parliament regulation, on a proposal from the European Commission.
A recent consultation — which ended on June 16, 2022 — was the first step towards Brussels legislation on a digital euro. From a legislative point of view, the adoption of a digital euro will notably require laws in areas such as privacy and the fight against money laundering.
After the current optimal design phase is finalized in October 2023, the board will then decide whether or not to move on to the next phase, which is expected to last approximately three years.
This means that the adoption of a digital euro is not guaranteed and, in any case, is not expected to materialize before the end of 2026.
In the meantime, there will also be domestic and foreign monetary policy and financial stability issues that policymakers will need to consider.
For example, regulators will have to introduce measures to prevent an excessive and abrupt transfer of deposits from commercial banks to the digital euro, which could create serious liquidity problems for banks with ripple effects across the world. system.
In addition, strong foreign demand for the digital euro from non-euro area economies could put upward pressure on the euro, which could seriously damage the price competitiveness of Member States.
A digital euro would also have implications for the monetary authorities of countries outside the euro zone. If digital currency were to become widespread, it could weaken the effectiveness of monetary policy in non-euro area economies.
All central banks have a mandate to maintain the value of their national currency, both in physical and digital form.
Therefore, EU policymakers should take a multilateral approach to a digital currency, in close coordination and cooperation with their counterparts in other countries, taking into account the implications of adopting a digital currency for all relevant stakeholders.