A Digital Euro: is the Industry ready for digital cash?

A Digital Euro: is the Industry ready for digital cash?

The euro area shows no sign of slowing down on the road to a digital euro. Open for responses until 14 June, the European Commission has published a targeted consultation, seeking the views of industry specialists, including payment service and infrastructure providers and AML supervisors on a central bank digital currency (CBDC) for the euro area.

This consultation should complement the European Central Bank’s (ECB) public consultation in 2021, part of a 24-month investigation phase into the possibility of launching a digital euro, which had limited input from professional firms.

The ECB has set an ambitious timeline of 2026 for making its digital currency a reality. For this to happen, it would not only require adjustments to the existing legislative framework of the EU in respect of Article 133 TFUE but also having a workable design, an adapted payments infrastructure, a user-friendly technological solution and stakeholder management.

A significant public education programme will also be needed to make it work. The ECB will have to make clear that its digital euro, backed by the central bank, is not a crypto “currency”. A crypto currency is not a currency in the traditional sense but is rather a speculative asset and a potentially risky one at that, especially given recent volatility in stable coins and bitcoin. There is clearly possibility of confusion between a digital euro, backed by a central bank and a largely unregulated crypto asset.

The ECB is far from the only central bank turning its eye towards making a CBDC a reality. In fact, according to the Atlantic Council, there are currently 87 countries, representing over 90% of global GDP investigating a CBDC.. Significantly, the Chinese are very close to a widespread digital yuan, with its pilot for businesses reaching 140m users in October last year. In April it launched a beta version of the digital yuan app for iOS and Android on domestic app stores.

Despite the Chinese momentum on the topic, the US Federal Reserve has remained somewhat sceptical, however the Boston’s Fed and MIT’s ‘Project Hamilton’, a multi-year CBDC research project, has just finished its first phase. The Bank of England is soon expected to launch its own consultation on a digital pound, while India’s finance minister said the country will launch a digital version of the rupee as early as this year.

So what can the ECB and others learn from the handful of central banks who have already gone digital? The Bahamas launched the “Sand Dollar” in 2020, the Eastern Caribbean Central Bank become the first currency union central bank to issue a CBDC, with “DCash” in March 2022, and the Central Bank of Nigeria launched the “eNaira” in October 2021.

All provide lessons in terms of developing a workable CBDC design and infrastructure and the importance of engaging with both existing financial service providers and citizens to facilitate adoption. Technological malfunctions and low adoption have been shown as potential risks. Earlier this year, “DCash” experiencing a prolonged outage before being restored, and downloads of the eNaira app remaining very low in comparison with the country’s population. The ECB and other central banks will undoubtedly want to avoid these issues, which will no doubt damage confidence in CBDCs.

However, none of these examples come close to the scale that will be required for the euro area, with 19 countries over 340 million citizens and complicated monetary policy implementation. To ensure trust and use by citizens, a digital euro will need to be very carefully designed and implemented.
The European Commission’s consultation is a great chance for financial services companies and other industry professionals to have their say on how this can be done, and how the potential risks to this monumental European endeavour can be mitigated. The results will offer valuable insights, not only into how a digital euro could best be implemented, but on the industry’s readiness for digital cash.

Author

Hume Brophy

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