The European Central Bank will decide in the spring, probably in April, whether to proceed with preparatory work for the launch of the digital euro, a complex project that would facilitate payments, but could also undermine the foundations of the financial system.
Facebook’s announcement of the project to launch its own digital currency in the summer of 2019 (initially called Libra, but currently called ‘Diem’) was a wake-up call for central banks and governments around the world.
Reaching 2.7 billion users with their own digital token, linked to sovereign currencies, was perceived as a threat by regulators.
Some central banks, including Sweden and China, were already working on digital versions of their own currencies. But many others have decided to explore the idea – after Facebook’s announcement – to protect their monetary sovereignty.
The ECB concluded on 12 January a public consultation that attracted massive feedback with more than 8,000 responses.
“We have received a mine of information that we are processing,” said ECB President Christine Lagarde on Thursday (21 January), who explained that it will lead to a report that will be publicly available.
“It is only in the spring, probably in April, that we will decide whether or not to continue the works that we will need to do,” he added.
Bank of Spain sources explained that, following this report, the ECB would decide on the launch of a pilot project to test the viability of the digital euro and gather more practical knowledge.
Still, Lagarde believes that the digital euro will eventually see the light of day. “My guess, but this is a decision that will be taken collectively, is that we might as well go in that direction,” she said last November. But, as she repeated several times, her introduction would not mean that the notes and coins will disappear.
The project also has strong supporters in the Commission.
“I think we need a digital euro,” Valdis Dombrovskis, vice president for economics, told a group of journalists on January 19.
The potential of a digital euro is immense, but it also has its challenges, as Lagarde noted.
A digital euro could facilitate payments across Europe and offer all euro area citizens the opportunity to have a deposit account in the hands of the ECB, since the central bank would not need the role of an intermediary that banks play nowadays.
But this may be your main risk, as citizens prefer to have their savings in digital euros instead of normal checking accounts, which can lead to deposit runs and huge financial turmoil in the event of a disorderly transition.
“It is a complicated issue that has to be resolved without disturbing the current financial scenario or compromising monetary policy decisions,” explained Lagarde, referring to the critical role of banks in the monetary and financial system.
Banco de España sources, however, explained that its impact on the banking sector will depend on how the transition is made and the final design of the digital euro. Even if deposits lose ground as a major source of bank financing, new opportunities will emerge, officials said.
In part, this is due to the fact that banks continue to play a role in this digital euro ecosystem, since they would have to interact with users and their ‘digital wallets’ and, therefore, maintain a link with their customers. , explained the consulted sources.
Another pending issue to be addressed is the technology that would drive the digital euro. It is not clear whether a distributed reason technology (blockchain) would be used, the same technology used as a backbone for cryptocurrencies like Bitcoin.
The technological choice will determine aspects such as the level of privacy, one of the main concerns raised in the public consultation, and the risks associated with Bitcoin and other cryptocurrencies, such as money laundering and terrorist financing.
Many of the potential issues raised by the digital euro were addressed by the ECB in a report published last October.
To address these political, legal and technical challenges, the ECB and the European Commission created, on 19 January, a joint working group to facilitate preparatory work.
Even if the ECB decides to move forward in April, Lagarde warned on Thursday that the digital euro is not due to arrive soon and “will take several years”.
In previous comments, she said it should become a reality in five years. But sources at the Bank of Spain said it would be more realistic to expect its introduction beyond that time frame, as China has been working on a digital yuan for more than five years and is still in the pilot phase.
[Edited by Zoran Radosavljevic]