Following the path of digitalization in Slovenia and Europe: The European Central Bank may launch a digital euro in the next four years
A digital euro would be like euro banknotes, but digital. It would be an electronic form of money issued by the Eurosystem (the ECB and the national central banks of the euro area). According to the European Central Bank (ECB), it would be accessible to all citizens and firms.
A conference on a digital euro plan was held at the National College of Ireland in Dublin. It was addressed by Dr Fabio Panetta, a member of the Executive Board of the ECB.
“A digital euro would fortify our monetary sovereignty and provide a form of central bank money for making daily digital payments across the euro area, just like cash for physical transactions. To succeed, a digital euro will need to add value for users, foster innovation, and enjoy strong political and societal support.”
Panetta went on to say that central banks provide a stable monetary base on which intermediaries such as banks build new payment and financial services. This coexistence has been a powerful driver of stability and innovation.
“But digital disruption and the declining use of cash – the only form of sovereign money currently available to the public – are threatening to upend this balance,” he said. “Consumers are increasingly turning towards non-cash payments. Only 20% of the cash stock is now used for payments, down from 35% fifteen years ago.”
According to him, the European Central Bank will always ensure that cash remains available. Still, cash could lose its central role and its ability to provide an “effective anchor” in the future as consumers turn to digital means of payment.
He also addressed cryptocurrencies and so-called stablecoins. According to him, recent developments in the market for crypto-assets illustrate that “private instruments” cannot act as money when they cannot be converted at par into public funds at all times.
“Confidence that “one euro is one euro” whatever form it takes rests on our ability to convert, at par, private money – such as funds held in bank deposits or digital wallets – into public money, which is the safest form of money available,” Panetta explained.
He added that cryptocurrencies are too risky to act as a reliable means of payment. “Anyone investing in cryptos must be prepared to lose all their investment.” To mitigate these risks, stablecoins have emerged and “become globally systemic, especially if issued by big techs.”
“But while the value of stablecoins is linked to what their issuers describe as “reserve assets” and adequate regulation and oversight could reduce risks, stablecoins are not risk-free,” he continued.
There is no guarantee that they can be redeemed at par at any time. They do not benefit from deposit insurance, nor do they have access to central bank standing facilities. He illustrated this with the recent crash of TerraUSD, a stablecoin.
So when will the digital euro be available?
In October 2021, the ECB launched a two-year investigation phase to define the design features of a digital euro, such as how to ensure confidentiality, which use cases to prioritise, and what business options to offer intermediaries.
The research also examines how to distribute the digital euro to retailers and the public, its impact on the market, and the changes to European legislation that might be needed.
The completion of this phase is planned for 2023 when the final decision on whether to develop a digital euro will be made. At this point, the implementation phase would begin, in which appropriate technical solutions would be developed and tested, and the business agreements necessary to ensure the issuance of the digital euro would be concluded. This phase is expected to last three years.
“And at every stage of the project, we will continue to engage with the European Commission (which recently launched a consultation on the digital euro), the European Parliament, and the finance ministers of the euro area countries,” Panetta said.
Author: Marko Želko
Keywords: digital euro, European Central Bank, European Union, cryptocurrencies
This article is part of joint project of the Wilfried Martens Centre for European Studies and the Anton Korošec Institute (INAK) Following the path of digitalization in Slovenia and Europe. This project receives funding from the European Parliament.
The information and views set out in this article are those of the author and do not necessarily reflect the official opinion of the European Union institutions/Wilfried Martens Centre for European Studies/ Anton Korošec Institute. Organizations mentioned above assume no responsibility for facts or opinions expressed in this article or any subsequent use of the information contained therein.