The Governing Council of the European Central Bank (ECB) said on Wednesday it was moving forward with a pilot project exploring the benefits and risks of introducing a digital version of the euro.
“Our work aims to ensure that in the digital age, citizens and businesses continue to have access to the safest form of money, central bank money,” ECB President Christine Lagarde said in a press release following the decision.
A digital form of currency used by the 19 eurozone countries could provide an alternative to third-party payment services and cryptocurrencies like Bitcoin. Interest in cryptocurrencies has exploded in recent years. But central bankers fear that the widespread use of foreign or unregulated currencies could destabilize the economy.
The project is scheduled to last two years. Meanwhile, the ECB aims to identify a possible design of digital currency as well as the potential impact on the European economy. The test phase will build on the initial research and experiences carried out by the central banks of the ECB’s euro area over the past nine months.
The ECB has stressed that a digital euro will not replace the physical euro. Rather, it would be used alongside it as an additional form of online payment, enabling faster digital transactions that don’t rely on powers outside the bloc.
China has been testing a digital version of the Chinese yuan since last year, and cryptocurrencies like Bitcoin are increasingly accepted by institutions around the world. These two developments, along with a decline in the use of cash, pose a threat to economic stability in Europe, some fear.
“Broad acceptance of a means of payment or a store of value not denominated in euros could weaken or even harm the transmission of monetary policy in the euro area”, writes the ECB in its “Report on a digital euro” published in October 2020.
“In such circumstances, the issuance of a digital euro could support European sovereignty and stability, especially in the monetary and financial dimensions,” he said.
More than three-quarters of German companies with more than 50 employees support the decision to introduce a digital euro, according to a representative survey by Bitkom, an association of German companies in the digital economy. Concerns about the rise of a foreign or private digital currency were the main reason to support this move.
ECB President Christine Lagarde said it was important to consider the role banks would play in deploying a digital euro
A big order
The pilot phase will help determine what a digital euro and its supporting infrastructure might look like. The investigation will be supported by focus groups, prototyping and other tools.
“You really have to look at all the technical details, the design, how to make sure the banking industry is really history,” Lagarde said in an interview with Bloomberg in the days leading up to the decision.
Determining how to integrate a digital offering into the existing financial system will be a key objective of the testing phase.
“A digital euro could hamper bank activity or generate instability in times of financial stress,” Ulrich Bindseil, managing director of market infrastructure and payments at the ECB, told DW in October. “But a well-designed digital euro can cope with these risks.”
“This is really the big problem facing central banks,” admits Markus Will, financial expert at the University of St. Gallen in Switzerland. “That they have to take with them the old banks that don’t really have the capacity or the technological components to deal with it.
A digital euro should also have the efficiency and anonymity of cash, no transaction fees and provide offline functionality in the event of extreme events such as cyber attacks or natural disasters, according to the report. ECB digital euro.
Like the physical euro, a digital version would be issued by the Eurosystem – the ECB and the national banks of euro area countries. The ECB stressed on its website that a digital euro would be separate from crypto-assets, which are not backed by any public institution and are subject to price volatility. A digital euro would be as stable as the physical euro.
Balance security and privacy
The President of the ECB said that data privacy is a major concern that must be taken into account in the development of a digital euro.
“At the same time,” Lagarde told Bloomberg, “we have to make sure that this does not accelerate money laundering or the financing of terrorism.”
The ability to exchange cryptocurrencies anonymously has made them popular with criminals. Another objective of the pilot project will be to determine how to protect the privacy of citizens without facilitating criminal activity.
Throughout the two-year exploratory phase, the ECB’s Governing Council will draw on input from the European Commission, finance ministers and parliaments of euro area member states, among others, to determine s ‘we have to move forward with this new form of money.
“It is not yet acquired,” said Lagarde.