Today the European Central Bank (ECB) published its paper on the digital euro, but was keen to emphasize that it has not yet decided to issue a central bank digital currency (CBDC). By mid-2021, the Eurosystem will decide whether to pursue a formal CBDC project. However, a go ahead to work on a project won’t require a commitment to issue one.
The ECB was keen to differentiate the digital euro from crypto-assets, which are ‘not the liability of any entity’ and stablecoins that attempt to keep stable. In contrast, the digital euro IS the risk free central bank currency. It also emphasized that a digital euro would complement cash. The draft crypto-asset paper, MiCA, published by the European Commission goes into more details into its classification of crypto-assets.
The ECB goal is to be ready should a scenario arise that might necessitate a CBDC. This echos previous statements from the Bank of Canada and others. Those triggers would include a significant decline in cash use where a digital euro would help address financial inclusion. A digital euro could see off risks such as the cybersecurity threat to private sector payment systems. Another trigger would be if a foreign CBDC or private digital currency started to be widely used within the European Union (EU).
“The euro belongs to Europeans and our mission is to be its guardian,” said Christine Lagarde, ECB President.
While these scenarios are defensive, the paper also highlighted positive drivers. For example, to support digitalization within the EU. Blockchain solutions always point to the enormous benefit of digital cash in enabling immediate payment. A digital euro would provide a new means for monetary policy transmission, potentially expand the euro’s role internationally, and improve payment systems’ costs.
The paper outlines 14 requirements and possible designs. While no decision has been made, it prefers to use intermediaries rather than having citizens with direct central bank accounts. But it plans to explore both account-based scenarios held via intermediaries and token-based.
It also has a desire to build on the existing Eurosystem infrastructure. Having a parallel system is seen as costly.
As always, there’s a concern that banks could be dis-intermediated. And the knock on effect on the availability of credit. One scenario might be to limit the amount of digital currency that users can hold. And the paper suggests it would also want to limit the amount that foreigners could own. There’s a possibility of issuing two different types of CBDC, one for offline use and one that is online.
Privacy was a topic that had mixed messages in the paper. A CBDC was portrayed as a better privacy alternative than private solutions and privacy was stated to be a desirable feature. There is also some suggestion of different degrees of privacy.
However, here’s what it says about the legal aspect. “Regulations do not allow anonymity in electronic payments and the digital euro must in principle comply with such regulations (Requirement 10). Anonymity may have to be ruled out, not only because of legal obligations related to money laundering and terrorist financing, but also in order to limit the scope of users of the digital euro when necessary – for example, to exclude some non-euro area users and prevent excessive capital flows.”
One of the conundrums is a lack of privacy might conflict with one of the five principles that were outlined in the paper: that end-users should trust a CBDC.
The other principles include convertibility into other forms of the euro. It’s a liability of the eurosystem and must be available on equal terms in all eurozone countries. And it mustn’t crowd out the private sector.
In the meantime, it seems that the Governance Council of the ECB concluded national central banks could experiment in a coordinated fashion. So today Estonia’s central bank announced a digital euro project with enterprise blockchain firm Guardtime.
Other European banks are already forging ahead with France in particular exploring a wholesale CBDC.
