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ECB gives the green light to digital euro project

By Neil Dennis

09:21, 14 July 2021

ECB building

The European Central Bank officially launched a 'digital euro' project on Wednesday as officials announced the eurozone would take the next step into an 'exploration' phase.

The project will start with two years of investigative work, consulting focus groups, stakeholder institutions and financial intermediaries to define design and the appropriate legislative and regulatory frameworks.

"Our aim is to be ready, at the end of these two years, to start developing a digital euro, which could take around three years," the ECB said in a statement.

Digital transformation

The central bank says that digitalisation has become a part of everyday life and that people are increasingly seeking digital solutions in areas such as payments.

Christine Lagarde, ECB president, has been an active voice of opposition to the spread of cryptocurrencies such as bitcoin, and is also distrustful of digital currencies issued by large corporations such as the planned 'diem' by Facebook – formerly 'libra' – which she and the ECB see as threats to monetary sovereignty.

She believes, however, that it is now time the ECB should consider launching a central bank digital currency (CBDC) "if the need arises", acknowledging that roughly 80 other central banks are considering their own CBDCs.

Why a digital euro?

The ECB says a digital euro would guarantee that eurozone citizens could "maintain costless access to a simple, universally accepted, safe and trusted means of payment".

It would not replace cash, but complement it. However, the ECB has noted a shift away from cash that was accelerated by the coronavirus pandemic.

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Here's what the ECB itself says about the benefits of a digital euro:

  • It would combine the efficiency of a digital payment instrument with the safety of central bank money
  • Help in situations where people no longer prefer cash
  • It would avoid dependence on digital payment systems issued and controlled from outside the eurozone, which could undermine financial stability and monetary sovereignty
  • It would protect privacy to help maintain trust in digital payments

Other CBDC projects

According to a survey in January 2020 by the Bank for International Settlements, roughly 80% of the world's central banks were engaged in some sort of work regarding CBDCs.

It said: "About 40% of central banks have progressed from conceptual research to experiments or proofs-of-concept while another 10% have developed pilot projects."

Here are some of the most mature projects, according to research by PWC in April 2021:

Bahamas – started its 'sand dollar' project in 2019 and launched the digital currency in October 2020 issued through authorised financial institutions, with access through a mobile app digital wallet.

Cambodia – Project Bakong tested in July 2019 and launched in October 2020 links 11 commercial banks and payment processors. Digital wallets currently being tested.

China – the first major economy to pilot a digital currency, using the digital yuan for payments in four major cities. It is expected to be launched for widespread domestic use next year in time for the Beijing Winter Olympics.

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