Ready for a digital euro? At 25, the European Central Bank is preparing the future of money

FRANKFURT, Germany — As it celebrates its 25th anniversary on Wednesday, the European Central Bank is preparing a design proposal for a digital version of the euro, responding to pressure to develop technology that could change the way money is used in the world. over the next few decades.

ECB President Christine Lagarde said a digital euro could give people a way to buy things without relying on payment service providers controlled by non-EU companies. These could include Mastercard, Visa, Apple Pay and Google Pay.

The European Union’s Executive Commission is expected to present a proposal for legislation on the idea in the coming weeks, ECB officials say, while the central bank will publish a detailed proposal for the design of a digital currency in October.

Central banks around the world, including the US Federal Reserve, are cautiously considering digital currencies as cash increasingly gives way to electronic payments. Some smaller economies such as Nigeria, the Bahamas and Jamaica have already introduced digital currencies, while China is holding trials.

Central banks are also reacting to the emergence of cryptocurrencies, which have raised fears that one day people could turn to rival forms of digital currency that would undermine national currencies.

Central bank-backed digital currency is said to be a secure and stable means of payment – ​​unlike volatile crypto, the price of which has crashed over the past year and the collapses of exchanges like FTX have prompted calls to regulations. The EU became a world leader when it gave final approval last week to rules for the freewheeling crypto industry.

As Europe considers its own central bank-based digital currency, the bigger question is: how would it improve on what is already available to consumers?

“No one is in a position to answer this question, not even the ECB,” said Philipp Sandner, head of the Blockchain Center at the Frankfurt School of Finance. & Management.

“As a user, I ask myself, ‘What’s the benefit, why do we need another solution?'” he said.

Apple Pay, for example, lets people buy their morning coffee – and anything else – with a double tap on their phone, a seamless experience that the digital euro should match.

“You have to be at least as good as Apple Pay and Mastercard, which is hard, otherwise people won’t use it,” he said.

The goal of a digital euro would be Europe’s autonomy and resilience with regard to the largely invisible but critical systems that transfer money from consumers to merchants via banks and payment service providers, said said Lagarde during a recent roundtable.

She drew an analogy to Europe’s previous reliance on Russian oil and natural gas, which led to an energy crisis when the invasion of Ukraine cut off that supply.

“It’s very unhealthy to rely on one source of power, it’s very unhealthy to rely on one source of payment,” she said.

A digital euro could also help people who don’t have a bank account, it is thought, as they could hold cash on their phones.

The move towards increased digitalisation comes as the ECB celebrates 25 years since its creation on June 1, 1998, seven months before the introduction of the euro. An anniversary ceremony with German Chancellor Olaf Scholz and former ECB Presidents Mario Draghi and Jean-Claude Trichet is scheduled for Wednesday at the bank’s headquarters in Frankfurt.

The ECB is considering a digital euro for retail use that could even be transferred offline using a digital wallet on people’s phones. Early designs require a standard app, as well as use through existing online banking apps. This would not replace cash, but would add another way to hold Euros.

Even after the proposal is made, there would be three years of testing. The decision to actually introduce the digital euro would only come after that and would require EU approval.

Fabio Panetta, a member of the ECB’s executive board and head of the digital euro task force, says it would not replace cash and people would have the option, not the obligation, to use it.

“It would reduce dependence on a few dominant suppliers, increase competition and resilience,” he told EU lawmakers last month.

European banks greeted the proposal cautiously. They warn that without strict limits, digital euros could withdraw deposits from commercial banks, depriving them of funding for things like business loans and mortgages.

Panetta said holdings could be limited to the value of tickets in circulation, which is around 3,000 to 4,000 euros per person.

The European Banking Federation supports payment autonomy, but said a digital euro alone would not achieve this without banks and payment service companies creating new and better ways to manage payments themselves. payments.

“A digital retail euro, especially if it is not able to offer concrete added value compared to existing electronic payments, is not an appropriate or sufficient tool to meet all the objectives that have been set forward,” the band said.

Merchants, in theory, could push for greater adoption if they found paying in digital euros helped them avoid fees charged by credit card companies, said Sandner of the Frankfurt School.