The ECB launches the digital euro project with research to end in 2023

Important day for the future of money in the euro zone. The European Central Bank (ECB) has announced that it will move forward with the digital euro, at a time when central bank digital currencies (CBDCs) are in the crosshairs of governments and monetary regulators across the globe. Around 80% work in them. For the entity led by Christine Lagarde, giving the green light to the next phase means that the issuing institute will enter a period of exploration of this ecosystem that will last about two years.

"It has been nine months since we published our report on the digital euro. In that time, we have carried out new analysis, we have obtained the opinion of citizens and professionals and we have carried out some experiments, with encouraging results. All this has led us to decide to step forward and launch the digital euro project ", said the President of the ECB, Christine Lagarde. "Our work aims to ensure that in the digital age citizens and businesses continue to have access to the safest form of money, central bank money."

The new money "will change people's lives in a very intimate way," Lagarde told Bloomberg Television on Sunday. "What we've heard from people is that they want privacy to be protected. But at the same time we have to make sure that they are not accelerating money laundering or terrorist financing, so in each and every aspect we have to find the right balance, " she added.

The research phase will last 24 months and will aim to address key design and layout questions. A digital euro must be able to meet the needs of Europeans and, at the same time, help prevent illicit activities and avoid any undesirable impact on financial stability and monetary policy. This does not prejudge any future decision on the possible issuance of a digital euro, which will come later. In any case, a digital euro would complement cash, not replace it, the entity said in a statement.

These tasks are the first step for the citizens of the eurozone to have in their pockets, at least virtual, a single currency in cryptographic format, presumably, towards the middle of this decade, which will require a new decision of the Governing Council of the issuing institute . The representatives of the central bank have also assured that "they will work in harmony with the rest of the European institutions" in this project.

"We will engage with the European Parliament and other European decision-makers and inform them regularly of our findings. Citizens, merchants and the payments industry will also be involved," says Fabio Panetta, Member of the ECB Council and Chairman of the Working Group on High level on the digital euro.

Until now, the European monetary supervisor has developed a theoretical and technological model on which the future currency could be based. And it must be "a complement and not a substitute" for the euro as we know it, in the words of Mayte Arráez, deputy of the ECB's market infrastructure support division. This point has been reached after a process that began in October 2020, when the agency released the first clues about the creation of a digital euro. In January 2021, the results of an ECB public survey on the digital euro were released. It received more than 8 thousand responses in three months.

Now that the ECB is following the path it has been setting, it will follow in the footsteps of China, where tests of an e-yuan have begun in several cities. Eastern Caribbean islands that share a central bank, such as Grenada and Saint Kitts and Nevis, have already launched their own digital currency. The US Federal Reserve and the Bank of England are studying the possibilities for their economies.

According to the ECB report, this initiative could also boost the international reach of the euro if designed with a focus on security, low transaction costs and compatibility with other services.

According to the ECB researchers, "promoting the international role of the euro is not the main motivation for issuing a digital euro." "However, if the use of a digital euro were allowed in cross-border payments - a decision that has yet to be made - this would also have implications for the international role of the euro."

As for the digital euro, the ECB's website says that a digital euro would be "like banknotes, but digital." In reality, a key feature of banknotes and coins - the ability to make payments that are simultaneously anonymous and offline - will be difficult to replicate. "A digital euro will not replace cash, but would complement it, "the ECB has assured on various occasions.

Among the biggest risks that are considered, according to experts, one of the scenarios is that customers transfer their deposits to the perceived security of the ECB in the event of a crisis, which would mean a digital bank flight. To reduce this risk, Fabio Panetta, member of the Executive Committee, has suggested that a limit of about 3,000 digital euros ($ 3,550) that anyone can have be established, or that deeply negative interest rates be applied above that level to discourage large holdings.