The European Central Bank is expected to release a report into the viability of a ‘Digital Euro’ before opening public consultation.
According to an initial report from Reuters on September 10, ECB President Christine Lagarde confirmed that a full report and deep dive into the possible benefits and potential pitfalls of a European central bank digital currency (CBDC) would be made public in the coming weeks.
Lagarde gave the update during a Bundesbank conference in Germany as the focus on CBDCs ramps up around the world. The conference, titled Banking and Payments in the Digital World, was held over two days and looked to address the evolution of banking and international payments that has been driven by the emergence of cryptocurrency and blockchain technology.
China is considered to be out in front in terms of development and testing of its Digital Currency Electronic Payment (DCEP) pilot programme which is being tested in a number of major metropolitan areas by banks and various retail service providers.
Is the Digital Euro on the horizon?
While the Euro is still two years away from celebrating its 20 birthday, there’s a possibility that by the time it reaches that milestone many people across Europe could be using the currency in a completely digital form.
Various countries are at different stages of exploration of CBDCs, with some still looking at the bigger picture while others have moved past the conceptual stage and are actively developing and testing systems.
As Lagarde explained during her short address at the conference, the ECB is still at this early exploration stage and further details on the institution’s thoughts and plans in the space will be revealed over the next month.
“The Eurosystem has so far not made a decision on whether to introduce a digital euro. But, like many other central banks around the world, we are exploring the benefits, risks and operational challenges of doing so. The findings of a Eurosystem taskforce are expected to be presented to the public in the coming weeks, followed by the launch of a public consultation,” Lagarde said during her speech.
Three major considerations
Lagarde outlined the ever-changing landscape of the financial system and its gradual move into a new digital era. Payment systems are changing and have been greatly disrupted by the emergence of Bitcoin and the various other cryptocurrencies that have handed people control over the way they transact with each other which has begun to transcend the physical and ethereal boundaries of borders.
While conceding that the space is becoming increasingly dominated by digital solutions, Lagarde highlighted three major considerations for the development and use of a Digital Euro for retail usage in particular.
Lagarde highlights the fact that digital wholesale money is not a new phenomenon and is how banks have had access to central bank money for decades. The power of a CBDC lies in the way it can improve settlements through an economy:
“But new technology can be used to make settling financial transactions more efficient. It also opens the possibility of a retail CBDC, which would be very innovative in that it would be accessible to a wide audience. Introducing a digital euro for use in retail payments involves three considerations,” Lagarde said.
The first according to Lagarde is ‘maintaining access to central bank money’, with the Eurosystem continuing to issue physical banknotes with a Digital Euro serving as a complimentary feature for digital inclusion as a means of payment.
“While helping to address the consequences of a decline in the use of cash, a digital euro would also ensure that sovereign money remains at the core of European payment systems. And it would support innovation by providing an alternative to private forms of money for fast and efficient payments in Europe and beyond,” Lagarde added.
The second consideration pertains to the risks that are posed by creating a CBDC. Lagarde says that a major move of bank deposits to a Digital Euro could potentially change the role of banks financing the economy. As a result this could change the ECB’s ability to implement monetary policy and support financial stability, according to the ECB President.
Lagarde’s final consideration is that a Digital Euro needs to meet the general public’s ‘demand for digital payments’ without discouraging or disrupting existing private payment solutions.
“It would have to embrace the respective strengths of both the Eurosystem and the private sector to ensure that the payments landscape remains competitive and innovative,” Lagarde noted.