The digital euro is getting closer. Today, Wednesday, the Governing Council decided on the first framework conditions for a European CBDC.
The European Central Bank (ECB) has taken another step towards the digital euro. As the central bank announced on Wednesday, July 14th, it is launching an official “investigation phase” that will last 24 months. The monetary authorities want to clarify open questions about a digital euro such as usability and defense against illegal activities with the new form of money.
They also want to investigate whether and to what extent a digital euro can and should fulfill the same privacy properties as cash.
“The digital euro should guarantee a high degree of privacy. Technological possibilities already exist today to carry out anonymous payments in the digital world up to a certain threshold, ”says Jonas Groß, currency expert and project manager at the Frankfurt School Blockchain Center in an interview with BTC-ECHO.
It is also unclear whether and, above all, how fairness and inclusion aspects of a digital central bank currency (CBDC) can be implemented – after all, its use requires the existence of a certain infrastructure such as Internet and electricity connections.
ECB monetary policy with new possibilities
In addition, the weal and woe of monetary policy with the digital euro should be part of the study, it says in the ECB paper. Commenting on the central bank’s decision, ECB President Christine Lagarde said:
It has now been nine months since we published our report on a digital euro. During this time we have carried out further analyzes, solicited input from citizens and experts and carried out some experiments – with encouraging results. All of this made us decide to shift up a gear and start the project of the digital euro.
President Christine Lagarde in the ECB report.
However, it is still unclear whether the digital euro will really come in the end. According to the ECB, the investigation phase is open-ended; Cash will, however, remain part of the financial sector even in the event of a positive decision. This is what the central bank says:
This does not prejudice a future decision on the possible issue of a digital euro, which will only be made later. In any case, a digital euro would complement cash, not replace it.
ECB position on cash
Retail or wholesale euros?
There are two possible configurations of a European CBDC:
- 1. A so-called wholesale solution to which only the financial industry, such as credit institutions and the central bank itself, would have access, but not the end users.
- 2. A so-called retail solution that would also benefit consumers. In this form, the CBDC could be used just like cash, with the difference that the transaction is digital.
The central bank already had both variants in a comprehensive form in October 2020 Foundation paper discussed about the digital euro. This also gives rise to the great importance that cash still has in the European currency area: around 79 percent of all point-of-sale transactions are paid for in cash.
Which of the two options the monetary watchdogs favor is sometimes completely open. What is clear, however, is that the ECB is under pressure to the extent that the use of cash continues to decline. If the citizens only use digital money in the future, the central bank can no longer bring central bank money to men or women without a retail CBDC.
A retail solution would also result in new approaches to monetary policy. For example, users could hold their accounts directly with the central bank and no longer have to go through the intermediary bank. Some market observers see this as an enormous gain in efficiency as well as the possibility of being able to spend helicopter money directly, for example.
On the other hand, the highest monetary institution in Europe would endanger the core business model of the financial sector.
CBDC could strengthen independence from US corporations
Jonas Groß emphasizes another aspect:
A digital euro is necessary for Europe to reduce dependency on foreign private sector payment providers, such as big tech companies. A digital euro would offer a purely European payment infrastructure.
Jonas Groß opposite BTC-ECHO
A prerequisite would of course be a Retail CBDC that is technically at the same level as PayPal, Apple Pay and Co. in order to be able to process a corresponding rush at all.
All of this needs to be answered in the next two years.