The European Central Bank is investigating introducing a digital currency, to keep pace with a rapidly evolving digital economy.
It would be a major change in the way that the central bank issues money, but the ECB says it is considering the move in response to the increasing demand for safe and trusted electronic payments.
What is the digital euro?
A digital euro would be a digital form of the euro; a means of payment much like payment apps on mobile phones or credit and debit cards used to make payments electronically.
Daniel McLean, Project Lead, Digital Euro, ECB, has described it as a central bank liability for retail payments of citizens and businesses in the entire euro area.
The ECB says it would be secure and user-friendly like cash but would be different from “private money” because the money would be issued by the central bank, “providing an anchor of stability” for payment systems.
The ECB is keen to assure that if a digital euro is issued, it will complement, not substitute cash. It would function alongside cash as a response to consumers’ evolving demand to pay digitally, which accelerated dramatically during the pandemic.
The central bank says the distribution of the digital euro would be facilitated by payment service providers such as banks.
Why is the ECB considering issuing a digital currency?
In Europe, 70% of all of point of interaction payments and e-commerce payments, are made with non-European payment providers.
“This obviously is a concern for the ECB,” Mr McLean told an online briefing, organised by Sinn Féin MEP, Chris McManus, this week.
“We are concerned that where we do not have control over governance of key mechanisms to pay within Europe, we would have a problem there. We have to ensure that European providers are facilitated to provide for the euro currency in the way we move forward in digital payments.”
The ECB wants to ensure access to money and its role as a monetary anchor. There has been a decreasing trend in cash usage, “so maybe in the distant future where cash is not so much the preference of the user, that there will always be another way to access public money in the digital sphere.”
Mr McLean said the central bank thinks it is critical to facilitate the next step of the currency and to ensure the euro exists in the digital ecosystem.
The ECB, he said, wants “to protect monetary sovereignty, while avoiding market dominance of non-European payment providers”.
Why does the ECB believe a digital euro would be better than stablecoins and cryptocurrencies?
The ECB says a digital euro would be better because it is central bank money. This means that it would be backed by a central bank, designed to meet the needs of citizens.
It says it would be risk-free and it would respect privacy and data protection. Central banks have a mandate to maintain the value of money, independently of its physical or digital form.
The ECB says the stability and reliability of stablecoins ultimately depends on the entity that issues them. It says private issuers may also use personal data for commercial purposes.
What would the digital euro mean for consumers?
Arguably, there would not be a great deal of difference when using the digital euro compared with using other means of digital payments like Apple Pay, PayPal or Visa.
This has raised the question, is the digital euro even necessary?
The ECB envisages a digital euro that would be visible in online banking apps, allowing users to transfer money from their bank accounts into a wallet at the ECB and use it for payments. It would have the security of being backed by the central bank.
As well as enhanced security, European citizens could also benefit from lower transaction costs and better financial inclusion.
The central bank is also looking at introducing offline functionality so that consumers can transfer the digital euro from one device to another when there isn’t an internet connection.
What could the digital euro mean for banks?
Banks depend on deposits to provide loans and there is concern in the banking sector that the introduction of a digital euro could disrupt this process if a significant number of deposits are withdrawn.
The ECB plans to implement thresholds on maximum account balances for the digital euro.
It is essential for the success of the digital euro that the ECB strikes a balance between preventing disproportionate outflows from the financial sector and achieving a high market share.
There is also the issue of cost. If the digital euro is free to use, banks are concerned that they will be left paying for administration.
The central bank says a digital euro should not have negative consequences for the financial sector, and it will take into account that the currency should be mainly used as a means of payment and not an instrument for financial investments, and that supervised intermediaries should be involved in the handling of a digital euro.
Will the digital euro be user-friendly and inclusive?
The ECB says financial inclusion is part of every aspect when looking at the design of the product in the form of an app.
“We have to make sure that it is easy to use, that is is attentive to the needs of people who are not tech savvy, and that it is compatible with the European Accessibility Act,” Mr McLean said.
He said the central bank will also provide a physical payment card. “A lot of us are migrating to mobile payments, but we’re still used to a physical payment card when it comes to a lot of our payments that we make day to day.”
The Project Lead said it is critical that the central bank addresses financial inclusion to make sure that when it moves forward with a digital currency that sections of society are not left behind.
“We are not even calling this financial inclusion anymore, we are calling it digital financial inclusion.”
In the euro area, over 98% of people have a bank account.
“But it’s not about the bank account, it’s about how do you access that bank account digitally, and we know there is an issue, and we are being told very clearly by consumer organisations and the elderly associations that a lot of people have difficulty accessing digital services,” he said.
“We have to make sure that when we develop a digital euro, we do not go ahead without these sections of society.”
If the ECB issues a digital euro, will the central bank be able to track what consumers are spending?
The European Central Bank has sought the views of focus groups who have said the digital euro must be private.
The online component of the digital euro will work quite like a payment account but with central bank money.
Mr McLean said, “We have no interest in seeing transactional data, so we will design a settlement infrastructure that you cannot track payment behaviour. You cannot associate the payments with a particular user. It will be privacy by design.”
The only people that will be able to see payments are the intermediary (such as banks) that deals with the digital euro account.
Furthermore, the offline component will not facilitate intermediaries to see the transactional data.
“We also believe that users need to be in control of their data. It should not be a factor where a user is limited in functionality if they choose not to share some data with an intermediary,” Mr McLean said.
“All payments should be able to be carried out even if a user has chosen a high level of privacy with their intermediary. The default setting will always be private.”
Where does the digital euro project currently stand?
The ECB has been working for a year and a half on the ‘investigation phase’, putting together all the pieces of what the digital euro should look like.
That phase of the project is in line with the legislative initiative that the European Commission is working on to facilitate the issuance of the product.
Key stakeholders are providing input into the design and development of the digital euro, including banks, payment service providers, consumers, merchants, SMEs and policymakers.
In October, the project team plan to go to the ECB Governing Council and present what the digital euro should look like.
The Governing Council will then decide whether to move to the next phase – the development of integrated services, and the testing and possible live experimentation of a digital euro. This phase could take around three years.
It is unlikely that we will see the issuance of the digital euro until 2027 at the earliest.