European Central Bank Enters Preparation Phase for Digital Euro Launch
The European Central Bank (ECB) has announced its entry into the preparation phase for the development and launch of a digital euro, which will serve as a central bank digital currency (CBDC) complementing the existing cash and payment systems in the euro area. This move comes as the ECB aims to keep pace with the rapidly evolving digital landscape and meet the changing needs of citizens and businesses.
During the two-year preparation phase, the ECB will undertake technical and policy work to design the features and requirements of the digital euro. The institution envisions the digital euro as a form of electronic money issued by the central bank, which will be legal tender and accessible to all citizens and businesses. It will be available through digital wallets provided by intermediaries such as banks and payment service providers, enabling both online and offline payments, as well as peer-to-peer transfers.
The digital euro will be backed by the ECB’s assets, ensuring that users face no credit or liquidity risks. The decision to launch the preparation phase is based on the outcomes of a public consultation that ran from October 2022 to January 2023, as well as an investigation phase that involved experiments and analysis by the ECB and the national central banks of the euro area. Over 8,000 responses were received during the public consultation, indicating a strong interest and support for a digital euro, with respondents prioritizing privacy, security, usability, and low costs as key features of the CBDC.
One of the key concerns surrounding the introduction of a digital euro is its potential impact on the banking sector. The ECB has sought to alleviate these concerns, clarifying that the digital euro aims to provide an alternative and complementary option for payments rather than compete with or replace bank deposits. The ECB has also proposed safeguards to limit its impact on banks. These measures include potentially imposing a cap on the number of digital euros each user can hold, charging a penalty interest rate on holdings above a certain threshold, or requiring intermediaries to remunerate or invest part of their digital euro holdings with the central bank.
Moreover, the ECB argues that the digital euro could bring forth several benefits for banks, including a reduction in dependence on costly and inefficient payment systems, an enhancement of customer relationships and loyalty, and the creation of new business opportunities and revenue streams. The ECB anticipates that the digital euro will foster innovation and competition in the payment market, resulting in more efficient and diverse services for users.
The ECB has identified several main objectives for the digital euro, including supporting the digital transformation of the European economy, promoting financial inclusion and innovation, enhancing the resilience and diversity of the payment system, and reinforcing the international role of the euro. Emphasizing that the digital euro will not replace cash but instead complement it as a means of payment, the ECB has highlighted that physical cash will remain a viable option alongside the digital euro.
To ensure the digital euro meets the needs and expectations of users, the preparation phase will involve close cooperation between the ECB and various stakeholders. National authorities, European institutions, market participants, civil society organizations, and international partners will all be engaged in the process. User testing and experimentation will also be conducted to refine the design and functionality of the digital euro.
At the end of the preparation phase, the ECB will determine whether to commence a formal investigation phase, which would span approximately three years and would involve a pilot project with selected users. The launch of a digital euro would symbolize a significant milestone for the euro area and a landmark development in the global adoption of central bank digital currencies.
