The European Central Bank (ECB) has taken significant steps toward the development of a digital version of the euro. It aims to provide secure and free electronic payment options for the 20 nations that share the single currency.

ECB's Two-Year Preparation Phase for Digital Euro

The ECB has announced a two-year "preparation phase" set to commence on November 1, during which rules will be finalized. Private-sector partners selection, testing and experimentation will be conducted during the preparation phase. At the end of this preparation phase, the Governing Council will decide whether to proceed to the next stage. It will pave the way for the potential issuance and rollout of a digital euro.

While this marks the initial stages of a multi-year project, it positions the ECB ahead of other central banks, including those from the Group of Seven (G7) wealthy nations, potentially serving as a blueprint for their own initiatives.

While several Caribbean countries and Nigeria have already launched digital currencies, China and Sweden have conducted pilot projects. In contrast, the Federal Reserve, the Bank of England, and the Bank of Canada have been more cautious about such endeavors.

The Surge in Electronic Payments in the European Union

The digital euro, much like an online wallet or bank account, will offer free use and be guaranteed by the ECB, enhancing safety. Nevertheless, the project faces criticism from various quarters, including bankers and regulators who fear a potential drain of deposits from the commercial sector. Some academics, the European Union’s privacy watchdog, and consumer groups have voiced concerns.

Critics argue that the digital currency may facilitate bank runs during times of crisis without substantial benefits compared to existing accounts. The ECB contends that the digital euro will introduce competition into the payments market, which is currently dominated by US credit card companies.

To address worries about depleting commercial banks, the ECB intends to impose a cap on individual holdings of digital euros, likely around 3,000 euros. The International Monetary Fund recently indicated that digital currencies should have a modest impact on monetary policy except during crises and published a guide for central banks.

Users of the digital euro will have the capacity to make small offline payments in digital euros to nearby counterparts, with the ECB pledging not to retain transaction-specific data. Distribution of the digital euro will involve both the ECB and commercial banks, as well as digital wallet providers. It will be accessible to residents of the euro area and its citizens abroad, addressing concerns about widespread adoption in regions with weaker local currencies.

Electronic payments in the EU have surged from 184.2 trillion euros in 2017 to 240 trillion euros in 2021, accelerated by the COVID-19 pandemic. A recent survey by the Bank for International Settlements indicates that central banks representing a fifth of the global population are likely to introduce their own digital currencies in the next three years.

This trend was initially triggered around 2019 when Facebook announced plans for a digital currency, although they were later abandoned. The rise of stablecoins, crypto tokens partially backed by traditional currencies, has given impetus to central bank digital currencies.