In October 2021, the European Central Bank and the national central banks of the euro area initiated the investigation phase of the digital euro project. This phase focuses on examining essential aspects related to the design and distribution of a digital euro.
Why do we need a digital euro?
The ECB contends that financial services created in one European country often lack availability in others, leading to disparities. Furthermore, the European card payments market is predominantly controlled by two non-European entities, whose cards face limitations in acceptance across all regions and businesses.
To address these challenges, the ECB aims to introduce a simplified payment instrument that is universally accessible throughout the euro area, promoting the widespread use and strengthening the euro currency.
Additionally, the digital euro has the potential to facilitate the growth and expansion of domestic payment providers as well as new instant payment solutions on a European scale. By reducing reliance on a few dominant providers, it would promote increased competition and resilience in the payment landscape.
Necessity
The ECB further asserts that, similar to banknotes in circulation today, individuals and businesses should have the freedom to utilise the digital euro for payments at any merchant within the euro area, irrespective of intermediaries--banks and other providers of payment services--or countries involved.
However, the usage of the digital euro would not be obligatory but rather a readily available choice.
In a modern economy, the ability to make digital payments is a fundamental necessity for individuals.
During a meeting of the Committee on Economic and Monetary Affairs of the European Parliament in April, Fabio Panetta, a member of the ECB Executive Board, asserted, “In a modern economy, the ability to make digital payments is a fundamental necessity for individuals.”
Privacy concerns
The public consultation on the digital euro highlighted privacy as a major concern among users. In response, the ECB said it was collaborating with the European Data Protection Supervisor to ensure that the digital euro is designed with the highest privacy standards in mind.
Under the digital euro system, the ECB would be responsible for issuing the digital currency, but not for its distribution. Users of the digital euro would hold their accounts with banks and payment service providers, similar to the current arrangement. Consequently, by design, the ECB will not have access to users’ personal data or retain it.
Customer onboarding procedures and anti-money laundering/counter-financing of terrorism (AML/CFT) checks will remain the responsibility of intermediaries, just as is the case with electronic payments presently.
Financial inclusion
The ECB envisions that the introduction of a digital euro can significantly enhance financial inclusion.
To achieve this objective, it is essential for the digital euro to be easily accessible and usable by all individuals. This entails ensuring a seamless user experience that accommodates diverse preferences and technological capabilities. By enabling the use of the digital euro through both mobile applications and physical payment cards, individuals can choose the method that best suits their needs.
To encourage widespread adoption, the basic use of the digital euro should be made available free of charge. Additionally, service providers may choose to offer optional value-added services to end users, with the possibility of charging a service fee for such services.
Moreover, the digital euro should remain functional even in offline scenarios, ensuring that individuals can conduct transactions in areas with limited internet connectivity.
Recognising the importance of inclusivity, the ECB plans to address the needs of individuals with disabilities and those who may have limited experience with digital technology. By incorporating features and design elements that enhance accessibility and usability for these individuals, the digital euro can empower a broader range of participants within the digital financial ecosystem.
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Financial stability
Ensuring the financial stability of the eurosystem has been a primary focus throughout the development of the digital euro project.
To prevent excessive usage of the digital currency for investment purposes, specific design features have been implemented, including the establishment of limits on individual holdings.
For instance, a ceiling of €3,000 has been discussed, which aligns closely with the average gross salary in the euro area. This limit is considered reasonable and unlikely to pose risks to financial stability. However, larger payments will still be feasible through a connection between digital euro accounts and traditional bank accounts.
The digital euro would be a means of payment, not a form of investment or savings.
In an interview on 24 May, Panetta clarified on the role of digital euro on financial stability. He stated, “The digital euro would be a means of payment, not a form of investment or savings.”
Timeline
The European Commission is set to reveal a legislative proposal in June that will lay the groundwork for the regulatory framework of the digital euro. Subsequently, in October, the ECB intends to evaluate whether to commence a preparation phase dedicated to the development and testing of the digital euro. This phase is anticipated to span a duration of two to three years.
Next, if the necessary approvals from the ECB, member states and the European Parliament are obtained as scheduled, Panetta said, “we could launch the digital euro in three or four years.”