Digital euro project
Digitalisation has spread to every corner of our lives in recent years, and has brought major changes also to financial services. Payments is one area that is evolving rapidly as new technologies have arisen and become widely available. This is also being driven by the needs and expectations of users, who are gradually replacing their use of cash with digital payment instruments. The central banks of the Eurosystem are also actively responding to the progress brought by digitalisation, and while encouraging the financial sector to develop secure and effective payment solutions, we are also ensuring the development of our own systems and solutions. In the digital euro project we are examining the possibility of issuing a central bank digital currency, the digital euro, which would provide consumers and businesses with a handy means of making secure, fast and cost-effective payments, fit for the digital age.
Reasons to issue a digital euro
In addition to supporting digitalisation, there are several arguments for issuing a digital euro. Should demand for cash in the euro area decline sharply, this would entail a shift to the use of (private) digital payment solutions. The digital euro could be an additional form of payment, one that – because it would be issued by an institution against whom claims are risk-free – is also safer. It would not replace cash, which is an equivalent claim against the central bank, but would rather complement it, and could be used in the digital world.
The digital euro could also address the growing popularity of cryptoassets and stablecoins, and the rapid development of central bank digital currencies by foreign countries that in the future might become a serious alternative for everyday payments. In these circumstances a European central bank digital currency would ensure that European financial stability and sovereignty are maintained. Furthermore, the digital euro would also ease the transmission of monetary policy for central banks, as, for example, the Eurosystem could exert a direct influence on consumption and investment by the non-financial sector via the interest rate on the digital euro.
The possibility of the Eurosystem issuing its own central bank digital currency is also relevant to upholding the international role of the euro, particularly if people outside the euro area are granted access to the digital euro. And not least, a digital euro based on efficient and environment-friendly technologies could reduce the carbon footprint of European payment systems.
In addition to the aforementioned arguments, the digital euro could also be an opportunity to deepen cooperation between central banks and the private sector, and to develop payment services in general, as its issuance could further encourage innovation in the area of retail payments.
Analysis of central bank digital currencies began at the Eurosystem in 2017, since which activity in this area has been stepped up. After publishing the Report on a digital euro in 2020, the ECB held consultations with the professional and the general public with regard to the expected attributes and functionalities of the digital euro. In July 2021 the Governing Council of the ECB confirmed the start of the two-year investigation phase of the digital euro project. This began in October 2021, and is aimed at examining the possibilities of issuing a digital euro, where the desire is to answer key questions such as what the digital euro would look like, what it would be used for, and when it could be available. Based on the findings of the investigation phase, a decision is expected to be taken in 2023 as to whether the project moves forward into an implementation phase. If, after a successful conclusion is brought to the implementation phase, a decision is taken to issue a digital euro, it would first be available to users by the end of 2025 or early 2026.
Key unresolved questions
The aim of the investigation phase of the digital euro project is to provide answers to fundamental questions in connection with the form and distribution options of the digital euro.
One of the key unresolved questions relates to how end users have access to the digital euro. There are currently two options under discussion: a direct model and an intermediated model. Under the direct model end users would access the digital euro directly via the central bank, while under the intermediated model supervised financial intermediaries (e.g. banks) would be responsible for distribution. The digital euro could be provided either through an account-based system or as a bearer instrument (token-based digital euro). A bearer digital euro based for example on distributed ledger technology (DLT) could provide for new functionalities that are more difficult to provide with existing technologies, such as programmable money.
It is also necessary to answer whether the digital euro will allow for offline payments, and to seek the right balance between privacy and the regulatory requirements deriving from AML/CFT legislation. It is further necessary to decide whether and how the digital euro would be remunerated. It also needs to be resolved via which devices (mobile phones, cards, smart watches, etc.) the digital euro would be available to end users, without exacerbating financial exclusion.
All the answers obtained in the investigation phase will provide important guidance in the implementation phase if the Eurosystem decides to actually go ahead in 2023.