The European Central Bank is working on the digital euro project. Here’s what it is, how it works, what it will be used for, the timing, and the risks of the electronic version of the euro.
Europe is getting closer to the digital euro, but what is it and how does it work?
The European Commission has recently issued two legislative proposals: the first to safeguard cash circulation continuity; and the second to establish a legal framework for the digital euro.
Secondly, the ECB is evaluating the possibility of integrating the digital euro into cash, with the aim of offering a new payment solution. The latter would also be usable with private payment methods, such as cards, and would allow you to pay both with and without an internet connection.
The digital euro, which would be distributed by banks and other authorized service providers, would then have to be accepted by most merchants, except for the smallest ones, who would be exempt as they would face operating costs too high.
Now that the legislative proposal for the legal framework has been issued by the Commission, it will be necessary to wait to see if this will also be adopted by the Parliament and the European Council. At that point the ball will pass again to the ECB, which will have to decide whether and when to issue the digital euro.
The plan for the creation of the digital euro officially began to take shape in July 2021, when the Governing Council of the European Central Bank kicked off the preliminary phase of the digital euro project which could be completed in the next few years.
The time has therefore come to ask ourselves what is the digital euro, how does it work, when will it arrive, what will it be used for and how will we spend our digital euros?
What is the digital euro
The digital euro would be the CBDC (Central Bank Digital Currency) of the Eurozone. Similar to and inspired by cryptocurrencies, but not to be confused with them, CBDC are the digital version of fiat currencies.
In essence, the digital euro would be the electronic equivalent of euro banknotes and coins. A virtual currency parallel to cash, legal tender, and guaranteed by the European Central Bank. It is used for payments in 20 countries and accessible to companies and citizens to pay in a faster, safer and more innovative way.
How the digital euro will work
The digital euro would work like virtual currencies, so it could be issued and transferred using the blockchain (but not necessarily) and stored in digital wallets (wallet).
However, unlike classic cryptocurrencies, it would be implemented and controlled by a central bank, government, or approved third-party company, even if it were distributed on a public block ledger.
But how do you open digital Euro accounts? The ECB has said it will leave this task to banks and some regulated fintechs, who will then offer digital wallets in euros to customers on behalf of the ECB.
We will most likely be able to spend the digital euro only on small payments (a few hundred euros), using devices connected via Bluetooth or NFC. Even when it is launched, the digital euro will not replace cash, but will supplement it. In short, it will be an alternative, a complementary instrument to cash in circulation.
What will the digital euro be for?
The European Central Bank does not want to leave digital payments to the private sector, particularly if cash use declines.
“Our work aims to ensure that in the digital age, citizens and businesses continue to have access to the safest form of money, central bank money”, said the president of the ECB Christine Lagarde.
ù
The aim of the digital euro, therefore, is to meet Europeans’ needs, while helping to prevent illegal activities. A central bank digital currency that is secure, accessible and efficient.
As described in the ECB report on the digital euro prepared during the public consultation, electronic money would support some strategic objectives of the Eurosystem: the possibility of providing cutting-edge payment services that meet new trends and new consumer needs (which also emerged following the Covid-19 pandemic), the promotion of innovation in the field of payments and financial inclusion.
Furthermore, the digital euro could represent an option to reduce costs overall and the ecological footprint of monetary and payment systems.
A digital euro designed by the central bank to embrace financial technological innovation would make payments faster and easier to track and contain financial crimes, even if there are doubts and misgivings on the front of privacy and fundamental freedoms.
The reasons why the ECB should adopt the digital euro are reported in the aforementioned document, and are essentially the following:
1) The digitization and independence of the European economy can benefit from a digital form of money issued by the central bank. The digital euro could keep pace with cutting-edge technology so as to meet the market needs better regarding e.g. usability, convenience, speed, cost efficiency.
2) The digital euro would be beneficial in case cash is used less and less. The digital euro as an additional form of public money and means of payment would serve users’ needs. However, it should be cheap to use, safe and risk-free, efficient and easy to use for everyone.
3) A form of money other than physical becomes a plausible alternative as a medium of exchange and, potentially, as store of value in the eurozone.
4) The issuance of a digital euro would support European monetary and financial sovereignty and stability in the face of the threats posed by the creation of CBDCs by foreign central banks available to European citizens and by the development of payment solutions such as stablecoins by large private companies.
5) The digital euro could help mitigate the chances that a cyber attack, natural disaster, pandemic or other extreme event could hamper payment services. Let’s think about the possibility that a cyberattack will interrupt card payments or withdrawals at the counter. In these scenarios a digital euro, as a close-to-cash solution, could be an emergency remedy for electronic retail payments, when other solutions are not available.
When will the digital Euro happen?
The digital euro will not arrive for the next 3 years. Before deciding whether to issue a digital euro, the ECB needs to establish what its design will be and test its ability to meet the needs of end users. In addition, it needs to analyze how financial intermediaries could provide front-end services based on a digital euro. In July 2021, the preliminary phase of the digital euro project was announced, which will be completed by October 2023.
The Governing Council will then decide whether to move on to the next phase, that of testing and possibly actually experimenting with a digital euro, which could last a long time.
According to experts, the digital euro will not arrive before 2028.
Meanwhile, the path of central bank electronic currencies has already been traced: in China, the experimentation of e-yuan, the digital version of the yuan, began in autumn 2020 and has so far involved 15% of the population, concentrated in 12 major cities including Beijing and Shanghai. In January 2022, 260 million users used the e-yuan at least once.
US Treasury Secretary Janet Yellen has also spoken out in favor of attempts to create a digital dollar, printed by the Federal Reserve and based on blockchain technology.
Furthermore, in May 2023, the ECB published the results of some tests carried out between July 2022 and February 2023. The research led to two important conclusions, namely that "there is a sufficiently large pool of European suppliers capable of developing digital euro solutions" and that "different types of architectural and technological design options are available to build a technical solution for a digital euro".
The ECB, in particular, has experimented with how the payment process could work with the digital euro and a settlement system designed and developed by the Eurosystem.
These tests showed that "a digital euro can be easily integrated into the existing payment landscape, while still leaving room for the market to use innovative features and technologies when distributing a digital euro. The results also confirmed that a digital euro could, in principle, work online and offline using different technical designs".
We will have to wait to find out whether the ECB will proceed with the preparatory phase to develop and test the digital euro. Be that as it may, even if this were to happen, "does not necessarily mean that (the ECB) will issue a digital euro" but rather that "the Governing Council will take a dedicated decision on whether to issue a digital euro at a later stage ".
Risks and benefits of the digital euro
A Central Bank digital currency would be based on digital tokens that would circulate in a decentralized manner and allow for anonymity towards the bank like cash, in full compliance with the standards of privacy and financial freedom that Europe must guarantee its citizens.
And yet there were doubts: isn’t there a risk of exposing sensitive data? Don’t you risk jeopardizing your freedom and being controlled by strong powers?
According to some, a digital euro structured like the digital yuan could give the government control over financial movements. This would include the ability to block individual funds at its discretion and program smart contracts to enforce or prohibit certain categories of spending.
The ECB posed the problem, explaining that the introduction of a retail digital euro could have very serious implications on the entire financial system, and that is why so far central banks have not provided access to retail money even though the technology to do so was already available.
“Some argue that a token-based digital currency may not guarantee complete anonymity. If this proves to be true, it would inevitably raise social, political, and legal problems”, said Yves Mersch, governor of the Bank of Luxembourg, in his speech on the digital euro.
But not only. “Disintermediation would be economically inefficient and legally unsustainable. A retail CBDC would create a disproportionate power concentration in the central bank. These potentially adverse effects on the financial system would appear to outweigh the anticipated benefits of introducing a retail CBDC”, concluded the ECB official.
Original article published on Money.it Italy 2023-06-29 16:20:08. Original title: Euro digitale: cos’è, come funziona e quando arriverà
