Today the Governing Council of the European Central Bank (ECB) decided to proceed with a 24-month central bank digital currency (CBDC) project to investigate the potential of a digital euro. Even if it decides to go ahead with a digital euro, the ECB President has previously stated it would take five years to launch.
“Our work aims to ensure that in the digital age citizens and firms continue to have access to the safest form of money, central bank money,” said ECB President Christine Lagarde.
While no decision has yet been made whether to issue a digital currency, the ECB and European national central banks have outlined several motivations over the last year or more. The first, as Lagarde stated, is to ensure that as cash usage declines, there is still central bank money but in a digital form. Without a CBDC, there’s a risk that private digital currencies, including stablecoins, will dominate, and they still might. Such a scenario would make it harder for the central bank to control monetary policy, maintain financial stability, ensure low cost payments and enable financial inclusion.
Increasingly payment infrastructures are dominated by large global firms, such as Visa, Mastercard and Big Tech. None of these providers are European and the ECB is keen to promote homegrown payment infrastructures such as the European Payments Initiative.
One of the challenges facing the ECB is quite different attitudes across the Eurozone, as highlighted by its CBDC survey results in April. Germany dominated the survey accounting for 47% of respondents, and 87% of participants were male.
Meanwhile, in today’s announcement, the central bank outlined four pillars of the work to be carried out. The first is engagement, both at a parliamentary level, with citizens, merchants and the payment industry.
Secondly, it will build prototypes and carry out conceptual work. It already investigated the potential of using either the existing TARGET Instant Payment Settlement (TIPS) or blockchain and found both were capable of processing in excess o 40,000 transactions per second in an eco-friendly manner.
Another aspect of its work will be to explore legal changes required.
And finally, it will investigate the impact of a digital euro. These include privacy issues, how it will impact intermediaries and the effect on commercial bank deposits, as well as potential ramifications for the broader economy. The central bank previously floated the idea of limiting digital euro deposits to €3,000 per person to reduce the outflow of commercial bank deposits.
At the same time, the central bank published the results of some of its recent work.