The European Central Bank takes another step towards creating a digital euro. It gave the green light on Wednesday to a two-year investigation phase which will determine the contours and functioning of this electronic money intended for individuals.
Buying a sandwich, or transferring money instantly and free of charge to book a hotel in Berlin with an electronic wallet made up of digital euros provided by the European Central Bank, may be possible as early as 2025.
The ECB has just taken a big step towards the creation of a digital euro, this Wednesday, by giving the green light to a two-year investigation phase. Christine Lagarde, President of the ECB said:
“Our work aims to ensure that in the digital age, citizens and businesses continue to have access to the most secure form of currency, central bank money.”
It is a question of not leaving the field entirely free to private initiatives, whereas the use of cash has decreased in Europe in favor of electronic payment. Even in Germany, where the attachment to coins and banknotes is still very strong. Facebook confirmed last May, the launch of the “diem”, an electronic currency backed by the dollar. Central banks take a very dim view of this irruption of large private groups in the very regal domain of currency issuance. The objective is also to provide the possibility of making digital payments to populations unfamiliar with technologies.
For the ECB, this new step will make it possible to define the contours of the digital euro and the way in which it can be used. The final decision on the actual launch of this e-euro “will only take place later” warns the ECB which also warns “that in any case, a digital euro would complement cash, and not replace it“.
One of the first questions that will have to be decided concerns the confidentiality of the transactions that will be carried out in digital currency. “We can guarantee respect for the privacy of users of the digital euro, because, unlike private players, we have no interest in using their data for commercial purposes,” said Fabio Panetta, member of the management board of the BCE.
Role of banks
However, unlike cash payments, which leave no trace, the electronic transaction will have to be recorded in some way. A possibility of paying “offline” for small amounts, less than 100 euros for example, is however being considered. We will have to find the crest line between respect for private life and the legitimate fight against tax evasion or illicit financing.
Another challenge is that of cooperation with banking establishments. “The objective is not to initiate a disintermediation of the role of banks,” insisted Fabio Panetta. The organization between the different payment players remains to be defined, but it is already certain that the total amount of digital euros that can be held by an individual will be limited. Beyond a certain ceiling – 3,000 euros for example – negative interest rates could apply.
It also remains to be determined which technology will be used: blockchain as for active cryptos, the ECB’s centralized payments system (TIPS), or a combination of the two. Tests have shown that both solutions work perfectly. And that the digital euro being centralized would have a small ecological footprint, much smaller than that of most active cryptos, like bitcoin, for example.
The digital euro could be available in five years. A delay that seems long in view of the speed with which technologies are developing. But it is necessary to provide a 100% safe solution. By comparison, China launched its e-yuan project in 2014, and only started full-scale testing the past year.
The announcement of this new step was particularly welcomed by the Governor of the Banque de France, who confirmed that the central bank would take an active part. And by a joint declaration by the French and German finance ministers who see it as an “important” step forward, with “considerable” implications for European citizens.