What You Need to Know About the Digital Euro Project

Financial technology has led to huge developments in the industry over the past decades, and one area in particular that is currently attracting growing interest from central banks around the world is digital currencies.

The European Central Bank (ECB) has already launched a project to create a digital version of the Euro (EUR). Meanwhile, the United States Federal Reserve is currently studying a similar move.

It is probably fair to say that how we deal with money has witnessed major disruptions over the past years, which could spark a new era in which we redefine money, dubbed by the ECB as “the age of digital money.”

This is especially after the emergence of cryptocurrencies, which continue to create controversy about whether they are real money, assets, or mere speculation vehicles, and with the growing use of blockchain technology.

Moreover, the Coronavirus pandemic has seemingly accelerated plans for digital transformation, as it showed the significance of electronic services and the growing usage of digital payments.

An earlier alert was when it was revealed that Facebook plans to issue its own cryptocurrency.

The ECB move comes with great importance since the EUR is the second-largest and second-most traded currency in the world after the U.S. Dollar (USD).

When is it coming?

On July 14, the ECB officially began a two-year investigative phase on the Digital Euro’s design.

It has been reported that it will not necessarily be using the blockchain technology.

Meanwhile, more time would be needed to ratify it and obtain the approval of regional and local regulatory authorities, bringing the total to an expected five years, according to the ECB.

“We will engage with the European Parliament and other European decision-makers and inform them regularly about our findings. Citizens, merchants, and the payments industry will also be involved”, said the ECB Board Member Fabio Panetta, who chairs the Task Force on a digital Euro.

“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.”

This was affirmed by recent remarks by a number of European officials.

One of those officials is Tuomas Valimaki, a board member of the Bank of Finland, who suggested that it would not represent a significant change for consumers in a country like Finland.

Valimaki told reporters that as the Finnish consumers are already used to digital payment methods, the digital currency would be less of a change, compared with other countries in the Eurozone, where roughly 80% of retail payments are still made in cash, the Helsinki Times reported.

Will it replace the Euro?

The ECB has shown no plans to replace the conventional Euro with its digital edition, especially with roughly 73% of PoS payments in the Eurozone made in cash in 2019.

“But a decision about whether or not to issue a digital euro will only come at a later stage. And in any event, a digital euro would complement cash, not replace it,” read the ECB statement.

The digital Euro will allow maintaining money in an electronic wallet at the ECB directly, not necessarily in a commercial bank.

Nevertheless, the ECB could also put a limit on owning the digital version of the unified currency to avoid eliminating the role of commercial banks.

What does it change?

On the other hand, this move would still be an overhaul to the digital payments domain, relatively moving it from private sector service providers directly to the central bank itself.

The ECB is advocating a positive point that it has no commercial interest in monetizing or exploiting the data of users and their privacy.

It also believes that it could help strengthen the services offered by intermediates to their customers, as they will want to stay competitive.

An extra motive behind such change could be that the biggest two most dominant names in the electronic payment industry come from outside of the European bloc, namely Visa and Mastercard, two US-based multinational corporations.

It is still likely that small payments of EUR 100 or less will continue to be carried through NFC and other digital means, according to Reuters.

In addition, the ECB wants to ensure a costless digital currency, promising to reduce the cost of transactions.

It is worth noting that about 300 billion retail transactions are carried out in the Eurozone every year.

When did it begin?

It is not only now that the ECB is starting to consider issuing a digital Euro, as it revealed that the launch of this project follows on from the exploratory work that it has done so far.

The first major move was the Report on a Digital Euro, which was published in October 2020.

This report then stated that by mid-2021, the Eurosystem will decide whether to launch a Digital Euro project, which just took place last week.

“Experiments were conducted in the four following areas: the digital euro ledger; privacy and anti-money laundering; limits on digital euro in circulation; end-user access while not connected to the internet and facilitating inclusiveness with appropriate devices. No major technical obstacles were identified to any of the assessed design options.”

Introducing a digital currency seems to be challenged by the aim of trying to balance the benefits of e-payments, such as convenience, speed, and efficiency, with combating the subsequent risks of privacy, safety, and accessibility.

The ECB also said that it received a record level of feedback, revealing a considerable interest from Europeans in these potential benefits.