The European Central Bank (ECB) made significant progress on Wednesday towards introducing a digital version of the euro, enabling residents of the 20 eurozone countries to conduct secure and cost-free electronic transactions.
The ECB announced the commencement of a two-year “preparation phase” for the digital euro on November 1. During this period, the ECB will finalize regulatory guidelines, select private-sector partners, and conduct testing and experimentation.
After the initial two years, the Governing Council will decide whether to proceed with the next phase of preparations, paving the way for potential issuance and implementation of the digital euro.
This move, while a preliminary step in a multi-year project, positions the ECB ahead of the central banks of other G7 nations and could serve as a model for others.
Several Caribbean nations and Nigeria have already introduced digital currencies, while China and Sweden have conducted pilot projects. In contrast, the Federal Reserve, the Bank of England, and the Bank of Canada have been more cautious in their approach to digital currencies.
The digital euro will function much like a standard online wallet or bank account but will be free to use and backed by the ECB, enhancing its security.
However, the project faces criticism, primarily from bankers and regulators concerned about its potential to divert deposits from the commercial banking sector. Additionally, some academics, the European Union’s privacy watchdog, and certain consumer groups have expressed reservations.
Markus Ferber, a German member of the European parliament, noted, “So far, the ECB has not been able to clearly communicate the added value of the digital euro.”
One prominent concern is that a digital currency might lead to bank runs during crises while offering limited advantages compared to existing accounts.
The ECB contends that the digital euro will introduce competition to the payment market, currently dominated by U.S. credit card companies.
To address concerns about eroding commercial banks, the ECB plans to set a cap on the amount of digital euros an individual can own, likely around 3,000 euros.
The International Monetary Fund recently stated that digital currencies are expected to have a modest impact on monetary policy outside of crisis situations and published a guide for central banks.
Similar to physical cash, users can make small offline payments in digital euros to nearby counterparts, and the ECB assures that it will not store transaction data.
The digital euro will be distributed by the ECB, commercial banks, and digital wallet providers, exclusively available to euro area residents and their overseas citizens, mitigating concerns about adoption in countries with weaker local currencies.
Electronic payments in the EU saw substantial growth from 2017 to 2021, reaching 240 trillion euros, largely driven by the COVID-19 pandemic.
According to a Bank for International Settlements survey, central banks representing one-fifth of the global population are likely to launch their own digital currencies within the next three years. This surge in interest gained momentum after Facebook announced and subsequently abandoned its digital currency plans in 2019. Stablecoins, crypto tokens backed by traditional currencies, have also reignited interest in central bank digital currencies (CBDCs).