As the whole world is starting to recognize the opportunities that arise from digitization more and more one of the European Union (EU) its institutions, the European Central Bank (ECB), seems to join in on the tendency to become more digital. Pieter Cranenbroek noted that the ECB is exploring various options for a ‘digital euro’. The ECB itself elaborates on a comprehensive report about the possible issuance of a digital euro, which became public on the 2nd of October this year, in a recent press release. The 55-page long report, prepared by a special EU task force – whose members will probably astonish anybody asking them what their job is since they are coined as ‘the Eurosystem High-Level Task Force on central bank digital currency’ – gives an extensive description on several aspects with regards to a digital currency. I will summarize the most important parts of the report in this blog.
What are the EU’s motives to look into possibilities for a digital euro? The short answer is: to hedge against the risks of future uncertainty. Multiple scenarios are described in the report that might unfold anytime in the upcoming years. By preparing a digital currency for Europe, the EU aims to be prepared for any of those scenarios – or multiple. Seven different scenarios are identified, of which the first five are related to core ECB functions and the last two pertain to broader EU objectives:
- The digitalization and independence of the European economy can benefit from a digital form of central bank money available to citizens;
- The role of cash as a means of payment declines significantly;
- A form of money other than euro-denominated (i) central bank money, (ii) commercial bank deposits or (iii) electronic money becomes a credible alternative as a medium of exchange and, potentially, as a store of value in the euro area;
- If the Eurosystem were to conclude in the future that the issuance of a digital euro is necessary or beneficial from a monetary policy perspective;
- There is a need to mitigate the probability that a cyber incident, natural disaster, pandemic, or other extreme events could hinder the provision of payment services;
- The international role of the euro gains relevance as a Eurosystem objective;
- The Eurosystem decides to proactively support improvements in the overall costs and ecological footprint of the monetary and payment systems.
What would the benefits be of such a digital currency? Most benefits actually originate from the beforementioned scenarios. A digital euro has all benefits that the euro currently provides. Additionally, the new valuta adds a lot of value in situations where people no longer prefer cash payments. Another advantage is that a digital euro cushions the impact of extreme events like natural disasters or pandemics – coincidence?
What would a digital euro’s characteristics be? The incredibly long-named task force sums up five core principles of a digital euro: (1) Convertibility at par: Not a parallel currency, (2) Liability of the Eurosystem: A digital euro is central bank money and its issuance is controlled by the Eurosystem, (3) European solution: Widely accessible on equal terms in all euro area countries through supervised service providers, (4) Market neutrality: Not to crowd out private solutions, and (5) Trusted by end-users: Trusted solution from the start and over time.
When can we expect a digital euro and what will happen to the euro we know? The development of a digital currency is still in the preparation phase. Actually, the ECB will start experimenting very soon and they host a public consultation on October 12th (see source ‘A digital euro’)! However, a decision on whether to pursue this digitalization will not be made until mid-2021. Besides, the digital currency is said to complement the current euro, rather than to replace it completely. So cash lovers do not have to worry anytime soon.
Is it a smart move of the ECB to investigate these digital possibilities? And which of the seven scenarios do you think is most likely to become reality? I am curious to see what you think.
Hope you enjoyed the read!
Sources:
- LinkedIn article – https://www.linkedin.com/feed/news/ecb-considers-issuing-digital-euro-5305506/
- ECB report – https://www.ecb.europa.eu/pub/pdf/other/Report_on_a_digital_euro~4d7268b458.en.pdf
- ECB press release – https://www.ecb.europa.eu/press/pr/date/2020/html/ecb.pr201002~f90bfc94a8.en.html
- ECB: A digital euro – https://www.ecb.europa.eu/euro/html/digitaleuro.en.html
Hi Youri.
Thank you for this interesting post about this topic. I have wondered if the European Central Bank has started to look into a ”cashless” system. Although I think this will pose many benefits, I am afraid that the implementation will be much more difficult than one would think. I have the assumption that every country within the European zone uses cash differently. One country might prefer to use as least cash as possible, think of Sweden or the Netherlands However, many other countries are the opposite, think of Germany for example.
As a result of this, I am afraid that the implementation and integration will create discrepancies between governments as some have more motive to pursue a cashless economy than others.
However, I do think that the scenario that cash will play a less important role in the near future. Many payments nowadays are already online and this will only increase. Also, consumer’s behavior is changing too. The new generation is already used to do everything online and this also means that they feel more comfortable with paying with an online system.
In conclusion, I too believe that there are many benefits to a cashless economy and I believe that this transition will be realized in the near future. However, I think that there will be many discussions and obstacles that may slow down the process.