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The Governing Council of the European Central Bank (ECB) has announced that it will soon move to the next phase — the preparation phase — of the digital euro project.
After two years of work creating a design for the digital euro, the ECB has confirmed its next steps towards a European central bank digital currency (CBDC).
“We need to prepare our currency for the future,” said Christine Lagarde, president of the ECB.
“We envisage a digital euro as a digital form of cash that can be used for all digital payments, free of charge, and that meets the highest privacy standards.
“It would coexist alongside physical cash, which will always be available, leaving no one behind.”
The next phase of the digital euro project will now start on November 1, 2023 and will initially last two years.
This will involve finalising the digital euro rulebook and selecting providers that could develop a digital euro platform and infrastructure.
It will also include testing and experimentation to develop a digital euro that meets both the Eurosystem’s requirements and user needs. Factors under consideration will include user experience, privacy, financial inclusion and environmental footprint.
After two years, the Governing Council will decide whether to move to the next stage of preparations, paving the way for the possible future issuance of a digital euro.
Although the end of the design phase is significant, the launch of the preparation phase is not a decision on whether to issue a digital euro.
That decision will only be considered by the Governing Council once the European Union’s legislative process is completed.
By that time, the ECB will also take into account any adjustments to the design of the digital euro that may become necessary as a result of legislative issues.
The digital euro design
The decision follows the completion of an investigation phase, first launched by the Eurosystem in October 2021, which explored possible design and distribution models for a digital euro.
Based on the findings from the investigation phase, the ECB said it has designed a digital euro that would be widely accessible to citizens and businesses through distribution by supervised intermediaries, such as banks.
The ECB also said the digital euro would be free for basic use and available both online and offline, would settle payments instantly, and would offer the “highest level of privacy”.
In many ways, data protection is a pertinent topic for the ECB to get right. In ECB research, it has previously been identified as the number-one concern among survey respondents.
The ECB said data protection is a priority, and has noted that the Eurosystem would not be able to see users’ personal data or link payment information to individuals.
As reflected in the European Commission’s legislative proposal, the digital euro would also achieve a cash-like level of privacy for offline payments.
If issued, the ECB said it will be possible to use from person to person, at the point of sale, in e-commerce and in government transactions.
“No digital payment instrument offers all these features,” the ECB has said. “The digital euro would fill that gap.”
“As people increasingly choose to pay digitally, we should be ready to issue a digital euro alongside cash,” said Fabio Panetta, executive board member at the ECB and chair of the high-level task force on a digital euro.
Panetta, who is soon to begin a new role as governor of the Bank of Italy, said a digital euro would “increase the efficiency of European payments and contribute to Europe’s strategic autonomy”.
'A cliff must still be climbed'
The ECB’s decision is likely to be met with scepticism from the EU’s political class and payments industry.
Earlier in October, during a panel at the European Women's Payments Network moderated by Vixio, the audience was polled as to whether they were in favour of a digital euro being launched, and only three or so audience members raised their hands.
Last month, members of the European Parliament (MEPs) wrote to the ECB asking for the project to be postponed, and some in Brussels now believe the digital euro will not happen.
The MEPs said that the value of the digital euro as a payment system for the general public “remains unclear”, despite having been on the agenda for the ECB since 2020.
Victor Warhem, representative of the Centre for European Policy in France, told Vixio that “the retail CBDC wants to compete with Visa and Mastercard, and maybe also stablecoins, as major retail means of payment in the EU”.
Defending the project, he said: “The ECB and the Commission think the private sector cannot provide this geopolitical asset that is a purely European retail payment system, and can decide to move forward by compelling PSPs and merchants to act.”
Although the project might cost several tens of billions of euros for the European financial sector, Warhem said that policymakers believe it is worth building it in an increasingly “geopolitically divided world”.
However, he also warned that there are cliffs to be climbed. “Nothing proves EU citizens will use the digital euro, especially if they feel their data might be used by public authorities against their interests,” he said.
“This is a pure fantasy, that shall be pervasive given the strength of fake news dissemination nowadays.”
A source in politics recently told Vixio that constituents are already contacting their office about what they perceive as the dangers of CBDCs.
