14 June 2023
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What’s happening with the Digital Euro? Latest developments

Education

The digital euro is a potential new form of money that could complement cash and existing electronic payments in the Eurozone. It would be issued by the European Central Bank (ECB), and it would be a legal tender that anyone could use for their transactions. But what is the digital euro exactly, and why is it being considered? What are the benefits and challenges of introducing it? This article will try to answer these questions and provide a balanced overview of the digital euro project.

 

To achieve this, the article will delve into:

  • What is the digital euro?

  • Why is it being considered?

  • Pros and cons of the digital single currency

  • Timeline

 

What is the digital euro?

A digital euro would be an electronic version of euro notes and coins, a digital wallet that would be safely stored directly at the ECB rather than at a commercial bank. It would be a central bank digital currency (CBDC), meaning that it would be backed by the ECB’s assets and liabilities, and it would have the same value as cash (also known as public money). A digital euro would not replace cash, but rather offer an additional choice to consumers in situations where physical cash is less convenient.

A digital euro would be different from other forms of electronic money, such as bank deposits, credit cards, e-wallets or cryptocurrencies. Unlike bank deposits, a digital euro would not involve any intermediaries or credit risk, as it would be a direct claim on the central bank. Unlike credit cards or e-wallets, a digital euro would not require any fees or commissions for transactions, as it would be based on a peer-to-peer system. Unlike cryptocurrencies, such as Bitcoin or Ethereum, a digital euro would not rely on decentralised networks or complex algorithms, but rather on the ECB’s framework.

It would also be different from other CBDCs that are being developed or tested around the world, such as the e-CNY in China or the e-krona in Sweden. Each CBDC reflects the specific needs and preferences of its issuing country or region, and there is no one-size-fits-all model for designing and implementing them. A digital euro would have to take into account the diversity and complexity of the Eurozone, which comprises 20 countries with different legal systems, cultures and payment habits.

 

Why is it being considered?

The main motivation for exploring the possibility of a digital euro is to respond to the increasing demand for safe and trusted electronic payments in the digital age. New technologies and innovations are emerging in the payment sector, such as stablecoins (digital tokens backed by assets or fiat currencies) or global initiatives like Facebook’s Diem (formerly Libra). The ECB believes these developments pose potential risks for consumer protection, financial stability and monetary sovereignty.

By introducing a digital euro, the ECB aims to provide an anchor of stability for the payment and monetary systems in Europe. A digital euro would ensure that everyone has access to a safe and efficient means of payment that is accepted across the euro area.

 

What are the pros and cons of the digital single currency?

As the ECB is still investigating whether to introduce a digital euro, it does not have all the details of how it would work yet. However, based on its report on a digital euro published in October 2020, some possible benefits and challenges can be identified.

 

Pros

  • It would be user-friendly and easy to use with various devices, such as phones.

  • A digital euro would include safeguards against fraud, counterfeiting or theft.

  • A digital euro would be efficient and cost-effective for transactions within the euro area or across borders. It would also reduce transaction times compared to other payment methods.

  • A digital euro would reduce Europe’s over-reliance on American payment service providers, such as Visa, MasterCard and American Express.

 

Cons

  • A digital euro could have implications for commercial banks’ business models and profitability, as it could reduce their deposits and intermediation role.

  • A digital euro could pose risks for financial stability if it triggers large-scale shifts of funds from bank deposits to CBDCs in times of crisis or uncertainty (a phenomenon known as “digital bank runs,” increasingly referenced after the collapse of SVB).

  • A digital euro could encounter social challenges regarding its acceptance, adoption and use by the public and the market actors.

 

Timeline

In the first few months of 2023, the team behind the digital euro has been hard at work. They've looked at things like how people can get access to the digital euro system, what extra services it could offer, and how it could work better than other payment methods.

As we move into the second half of the year, there's still lots to do. In the next few months, they'll be deciding how to get the resources they need for the next stage of the project and will write up a comprehensive report on everything from how the digital euro could be launched, to how it will work and what it will look like. Then, in the autumn, the leaders of the project will make a big decision about what happens next. So, as we get closer to 2024, it looks like the digital euro is getting closer to its big debut.

 

Key Takeaways

The digital euro is a potential new form of money that could complement cash and existing electronic payments in Europe. It is still under investigation by the ECB, which will decide whether to launch it after conducting extensive analysis, experimentation and consultation with stakeholders. A digital euro could offer various benefits for users, such as accessibility, robustness, safety, efficiency and compliance with applicable laws. However, it could also entail significant challenges for banks, such as implications for their business models, financial stability and monetary policy transmission. Moreover, it could raise technical and social issues that need to be carefully addressed before its introduction. Finally, a digital euro has generated diverse opinions among stakeholders and experts, ranging from support to criticism.


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Disclaimer: Any information presented is for general education and informational purposes hence, not intended to be and does not constitute investment or trading advice or recommendation. No opinion given in the material constitutes a recommendation by M4Markets that any particular investment, security, transaction or investment strategy is suitable for any specific person.

It does not take into account your personal circumstances or objectives. Any information relating to past performance of an investment does not necessarily guarantee future performance.

Harindale Limited does not give warranty as to the accuracy and completeness of this information.

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