digital euro

Digital euro bill to be out by early 2023

The European Commission, the executive branch of the European Union (EU), is planning to propose a digital euro bill in 2023. The bill will complement the European Central Bank’s (ECB)  experimentation into a retail central bank digital currency for the union.

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The Commission’s plans to move forward with a bill is the most definitive sign so far that a digital euro could become a reality in the coming years. Since last year, the ECB has been giving mixed signals about the future of a digital euro. In September, just before the ECB’s two-year investigation into a digital euro kicked off, an ECB official said the project wouldn’t guarantee the launch of a digital currency. Later, ECB executive board member Fabio Panetta said a potential digital euro would ‘likely’ be legal tender.

With the rising popularity of private cryptocurrencies like bitcoin and stablecoins (which are pegged to the value of assets like the U.S. dollar), research into central bank digital currencies (CBDCs) has picked up around the world. A number of countries, including Canada and China, are running pilot programs, and Nigeria launched a CBDC in October. The U.S. and Europe, however, have moved at a relatively slow pace. In September 2020, ECB chief Christine Lagarde said that the EU has fallen behind in the digital payments race and that a digital euro could give it an edge.

Despite the urgency Lagarde expressed at that time, things are still moving at a cautious pace.

The digital euro discussion is a very, very slow discussion because it’s corporate, and the central bank plays a role. This makes it very complicated,” said Philipp Sandner, a German economist and head of the Frankfurt School Blockchain Center.

The Commission first published a report on a digital euro in October 2020, which was open to public comment until January 2021. A second public consultation is set to kick off next month, according to a report by Politico.

While EU think tanks like the Digital Euro Association (DEA) are advocating for a digital euro as a much-needed advancement in payments in the region, other researchers say a digital currency may not give the economic union the advantage it is seeking.

“Digital access to central bank money will hardly give the euro an edge in its competition with other currencies, be it the dollar or private global stablecoins,” Heike Mai, an analyst at Deutsche Bank Research, wrote in a report last year.

Retail digital euro will be used by consumers for day-to-day transactions?

The ECB is investigating a digital euro and trying to come up with a functional design for one without being sure if it will ever issue such a currency, according to Mai.

“They just want to get prepared to have a concept in place and then decide whether they are going to issue it or not. If they were to decide two years from now that they will issue a digital euro, it will probably take another two or three years to go through an experimentation phase of implementation,” Mai said in an interview with CoinDesk.

She added that the EU won’t see a digital euro in action for at least five years from now.

“So far, we don’t know what it’s going to look like. And there’s just not much information,” Mai said.

According to Jonas Gross, chairman of the DEA, banks will have a role to play in the design and issuance of a digital euro.

“The ECB released the report one year ago on their initial thoughts, and what we do know is that banks will be involved, so the central bank will not do all of it by itself,” Gross said.

The ECB is considering a retail digital euro that could be used by consumers for day-to-day transactions. Sandner expects that research will involve commercial banks. In November, the ECB tapped Evelien Witlox, a former director at Dutch bank ING, to lead the digital euro experiment. ING Group’s primary businesses include commercial and retail banking.

What the public wants?

The results of the Commission’s first public consultation on a digital euro showed that citizens in the EU consider privacy, security and the ability to use a digital euro in payments across the union’s 27 member nations to be priorities for a digital currency.

But the design of a digital euro that would address technology issues and privacy is still up in the air, Gross said.

It’s also unclear if the digital euro would be built on blockchain technology.

“The ECB has always pressed that they want the digital euro for payments. So as their main focus is to have a payment system, and to the question of whether it’s going to be blockchain based or maybe based on more conventional technology, that’s still open,” Mai said.

Sandner added that the ECB is working on a retail CBDC and is trying to do something with credit cards.

“You don’t need a blockchain for this,” Sandner said, adding that for capital markets and industrial use, a blockchain system could ease settlement processes.

In terms of privacy, Gross and Sandner say it’s actually possible to have a CBDC as private as cash, featuring anonymous payments.

“So, if the regulator and the central bank wants to have privacy the same as for cash, it’s not the technology that limits it. It’s rather a political and regulatory decision to be made,” Gross said.

It’s political goal too

The ECB has been clear about its objective of maintaining its sovereignty in finance and payments, according to Mai. But when it comes to retail payment systems, there has been a lot of successful competition coming from non-European service providers like Visa, MasterCard and PayPal. The ECB, the EU and other political institutions don’t like to see that, Mai added.

“They are not opposed to competition, just the opposite. They want competition in the payments market. And they have done a lot during the past years to get there. But they also want at least one retail payment system that works throughout Europe, in all European countries and is under European control,” Mai said. “So it’s also a political goal.”

Gross says there is definitely a geopolitical dimension to digital currencies, as seen in the global response to China’s digital currency eCNY system that’s now being tested.

“This means that China has an advantage of probably four or five years as compared to advanced economies. And this could also lead to the situation that the Chinese currency is used more on a global scale. But this is today really hard to analyze, because we don’t know yet,” Gross said.

Gross added that the ECB is following in the U.S.’ footsteps, referring to a statement made by the U.S. Federal Reserve Chairman Jerome Powell on how it’s better to get a digital dollar right than to be first.

“This is also the perspective the ECB is currently taking when it comes to the euro because they don’t seem to be in a rush. They want to analyze this formally,” Gross said.

Financial implications

The ECB must also consider the implications of a digital currency on financial stability. The ECB’s 2020 report on a digital euro laid out fail-safes for protecting banks from runs, which occur when large numbers of customers move deposits out of banks. That could happen during times when banks impose negative interest rates.

The ECB plans to mitigate those risks by remunerating digital euro holdings at a variable interest rate over time or by limiting the quantity of digital euros that users can hold or use in transactions, the report said. For example, a non-interest bearing digital euro is more likely to induce large-scale withdrawals in a negative interest rate environment, according to the report.

“While banknotes already offer a non-interest-bearing alternative to deposits, storage and insurance costs mean that deposit rates can be below zero without triggering large-scale substitution into cash,” the report said, adding that holding digital euros would likely bear lower costs than holding banknotes, which could make the digital euros more attractive when interest rates are negative.

But there are also concerns about low use when it comes to a central bank digital currency. In addition to saying a digital euro might not have a competitive advantage over private payment systems, Mai wrote in her paper that the widespread use of the digital euro as a means of payment is also not very likely.

“Still, a high degree of data protection could make it more appealing than other payment options for users who put great emphasis on their privacy,” Mai wrote.

Sandner disagreed, noting that central bank digital currencies don’t have a counterparty risk, or a possibility that the other party in a transaction (in this case, the central bank) won’t keep its part of the deal, which makes it relatively attractive compared with some private currencies.

“Especially for the euro in the capital market, it would make very much sense to have a central bank acting,” Sandner added.

But all of this still depends on what the ECB will decide on in terms of type, design and execution of a digital currency.

“We’re just at a point where the ECB is doing things to come up with a concept, and they don’t talk too much about what they’re doing right now, which is okay. They’re working on their concept, and we don’t have results yet. So in a way, we are waiting,” Mai said.


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