What did the ECB announce?

On July 14, the European Central Bank (ECB) announced the launch of a digital euro project, a project that will determine whether a central bank digital currency (CBDC) will be introduced in the euro area. The project will start with an investigation phase taking from Q4 2021 to Q4 2023.

The ECB stressed that a digital euro must meet the needs of the European citizens and companies and that it will test different prototypes in order to cater to these needs. The Eurosystem will build on the results of experiments that were already conducted in the previous nine months with different technological designs. Independent of the design choice, the digital euro should be a complement to cash, not a substitute, and shall not substantially crowd out commercial bank money. In the investigation phase, the Eurosystem will define business models for supervised intermediaries that will play a key role in the distribution of the digital euro. Part of the investigation phase of the project will also be to analyze the need for potential changes to the EU legislative framework that allows the issuance of a digital euro.

Whether a digital euro will indeed be launched will be decided after the initial 24-month investigation phase. The final phase of the digital euro project could take three additional years before a digital euro goes live. Thus, the digital euro might not become reality before 2026.

Our interpretation

1. We welcome the start of the digital euro project: A digital form of central bank money available for citizens is necessary for different reasons: A digital euro would secure access to legal tender and a riskless medium of exchange in the digital age. Additionally, a digital euro would ensure monetary sovereignty in a future in which many different forms of private monies or foreign CBDCs might emerge. However, we believe that a digital euro has to entail a special unique selling point (USP) that today’s digital payment systems do not have. This USP could, e.g., be programmability of payments, cash-like privacy, or offline payments. We welcome that all these features were already tested in the conducted experiments and will be studied further in the future.
   
   
2. We welcome the introduction of a Market Advisory Group that together with the Retail Payments Board will provide additional views from knowledgeable market participants. On July 2, we issued a call to action and suggested the introduction of such an advisory group to ensure that the digital euro meets the demands of different industries (payments industry, recipients such as merchants and intermediaries such as payment service providers and banks) as well as the European citizens. We particularly welcome that the advisors shall not represent their employers but work in personal capacity in order to preserve independence. We strongly believe that DEA Experts and DEA Fellows could provide helpful insights.
   
   
3. We welcome that the ECB investigates different technologies and has already experimented with different types of ledgers for the digital euro, e.g., a centralized ledger using TIPS, a decentralized ledger, and a combination of both. Further, hardware-based solutions to transfer a bearer token offline have already been tested. This approach supports the DEA’s claim that investigation into a digital euro should be technology-agnostic. We believe that there are potential benefits that the use of a distributed ledger technology (DLT) can bring to a digital bearer instrument-type of the digital euro, e.g., related to resilience and programmability. However, the superiority of using DLT crucially depends on the desired features and the identified use cases of the digital euro that will be determined in the investigation phase by the ECB together with the Market Advisory Group.