The European Union has long hinted that it would provide a central bank digital currency (CBDC) that will bring the benefits of currency digitization to the Euro - and, possibly, the European economy as a whole.
Well, it appears that the time for talk is over. Work is starting on the Digital Euro project, and it is starting in earnest.
Last month, the European Central Bank (ECB) announced via Twitter that it will be launching a project to assess the possibility of launching a Digital Euro. in its tweet, the agency explained that it will especially focus on designing and building the Digital Euro, as well as how best to distribute the asset to everyone within the Eurozone.
Time to Get Cracking
In an official press release, the ECB’s governing council explained that it had launched an investigation into the Digital Euro. The investigation is set to last for two years, during which the ECB hopes to design a digital currency that helps users make fast, secure, and seamless payments. The asset will also be useful to merchants and financial intermediaries, who will be in charge of keeping and maintaining its utility.
Going more extensively, the statement from the ECB pointed out that the agency already had some success with identifying the different ways to protect users and their privacy - especially considering the requirements of the General Data Protection Regulation (GDPR). The statement also explained that the Digital Euro will have much lesser energy requirements than traditional cryptocurrencies like Bitcoin.
Fabio Panetta, an executive board member at the ECB, pointed out that the Digital Euro’s success will significantly depend on the value it adds for everyone - everyday people, businesses, and the financial intermediaries between the two. He added:
"We will commit the resources necessary to design a marketable product. But a decision about whether or not to issue a digital euro will only come at a later stage. And in any event, a digital euro would complement cash, not replace it."
Why the Digital Euro is Important
The ECB has been very consistent in its messaging concerning the Digital Euro. The agency has pointed out severally that it doesn’t plan to use the asset to replace cash - instead, it would simply offer an alternative way of making transactions.
Focus on a Digital Euro has been significant following the coronavirus pandemic. A research paper from the ECB last year showed that the demand for digital payments skyrocketed due to the pandemic, with cash now becoming a medium for the virus’ transmission.
There is a significant chance that digital payments will remain in prominence once the pandemic blows over. So, the ECB is looking to put itself in a position to benefit immensely as this happens.
At the same time, the ECB has also stressed the need for the Digital Euro, saying that it would help fight the rise of “artificial currencies” from tech companies. In its annual review of the euro, economists Arnaud Mehl and Massimo Ferrari from the ECB spoke on the concerns over the rise of currencies from “foreign tech giants.” in part, they said:
“One concern could be a situation in which domestic and cross-border payments are dominated by non-domestic providers, including foreign tech giants potentially offering artificial currencies in the future. Not only could this threaten the stability of the financial system, but individuals and merchants alike would be vulnerable to a small number of dominant providers with strong market power.”
While the men didn’t pick their scapegoats, it’s easy to see that they mean Facebook. The ECB itself has long been wary of private cryptocurrencies. The agency recently demanded veto power from lawmakers in the European Union over the fate of private stablecoins like Facebook’s Diem project.
In an opinion document, the ECB explained that it should be given sole control and decision-making power over the implications of stablecoins on monetary policy and payment system operation. The agency added that all stablecoin issuers should be made to comply with the same liquidity requirements as banks and other financial institutions. With the veto power it is seeking, it hopes to ensure that these rulings will be binding on all nations within the Eurozone.
Besides Facebook, Amazon is also working on launching a cryptocurrency. It is unlikely that it will be a stablecoin, and the asset might also not have the same broad-reaching implications as Diem. But, if the e-commerce giant chooses to go the route of Facebook, the ECB hopes that the Digital Euro will be there to help offer customers yet another option.
For now, the Digital Euro is still not here. There isn’t much information about the asset as well, so it will be interesting to see how things pan out.