European Central Bank gives green light to digital euro pilot project

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The Governing Council of the European Central Bank (ECB) said on Wednesday that it would go ahead with a pilot project exploring the benefits and risks of introducing a digital version of the euro. continue to have access to the most secure form of currency, central bank money, ”ECB President Christine Lagarde said in a statement following the decision.

A digital form of the currency used by the 19 countries of the so-called Eurozone could offer 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.

German Finance Minister Olaf Scholz welcomed the decision, saying a digital euro was “essential” and offered “huge opportunities”. In addition, a joint statement by the German and French finance ministries also welcomed the test phase.

Central banks in many countries plan to release digital version of their sovereign currency

Play catch-up

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 zone”, 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.

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 technicalities, 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,” agrees Markus Will, financial expert at the University of St. Gallen in Switzerland. “That they have to take with them the old banks that currently 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 inputs from the European Commission, finance ministers and parliaments of euro area member states, among others, to determine s ‘we need to move forward with this new form of money.

“It is not yet acquired,” said Lagarde.



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