Preparing for the euro’s digital future

Blog post by Fabio Panetta, Member of the Executive Board of the ECB

Frankfurt am Main, 14 July 2021

We are entering the age of digital money. Much like commodity or representative money in the past, digital money is emerging in response to changes in society and technology.

Today, digitalisation is reaching all areas of our lives. The coronavirus (COVID-19) pandemic has shown just how fast such change can happen. And this is affecting the way we pay. We are increasingly buying digitally and online. The role of cash as a means of payment is declining.

Private solutions for digital and online payments bring important benefits such as convenience, speed and efficiency. But they also pose risks in terms of privacy, safety and accessibility. And they can be expensive for some users. Digital payments are still used more by consumers with higher incomes, whereas the preference for cash is higher among those with lower incomes, reflecting its essential role for financial inclusion.

Central banks cannot ignore these developments. Over many centuries, the sovereign has provided its own currency to citizens as a symbol of stability, safety and trust. Providing money as a public good is central to the mission of central banks.

Given the digital transformation under way, which has the potential to transform the payments landscape and even the entire financial system, central banks must be bold and keep up with the pace of change.

Today, the Governing Council of the European Central Bank has therefore decided to formally launch a project to get ready for the possible issuance of a digital euro. In concrete terms, this means that we will commit the resources necessary to design a marketable product. But a decision about whether or not to issue a digital euro will only come at a later stage. And in any event, a digital euro would complement cash, not replace it.

The launch of this project today follows on from the exploratory work we have done so far.

Our first step – the Eurosystem’s report on a digital euro – laid the groundwork and identified the rationale for potentially issuing a digital euro.^[1]

People living in the euro area have costless access to a safe and universally accepted means of payment in the form of cash. But this should also be true for digital and online payments. A digital euro would reduce the cost of transactions. It would foster financial inclusion by aiming to make digital payments available to those who currently don’t have access to financial services. And it would enable users to make their purchases across all outlets and countries in the euro area.

A digital euro would also provide safety. Just like cash, a digital euro would be a direct claim on the central bank and would therefore have no risk – no liquidity risk, no credit risk, no market risk.

Being offered by the central bank – which has no commercial interest in monetising the data of users – the digital euro would help to protect people’s privacy against commercial usage or unjustified intrusion. An appropriate, transparent governance set-up that complies with European regulation on data protection would further guarantee that users’ personal data are only accessible to legitimate authorities, with a view to preventing illicit activities such as money laundering or terrorist financing.

A digital euro would level the playing field and encourage innovation by enabling competing providers – large and small – to build on it. By providing services with “digital euro inside”, European intermediaries would be in a position to strengthen the services they offer to their customers and stay competitive even as global tech giants expand into payments and financial services. And central bank money would remain at the heart of the payment system, strengthening Europe’s autonomy in the age of digital money.

Our second step, after publishing the Eurosystem report, was to hold a public consultation. We received a record level of feedback, revealing a considerable interest from Europeans in these potential benefits. It also showed that the most important features of a digital euro for households and firms are privacy, security and broad usability.^[2]

In parallel, together with the national central banks (NCBs) of the euro area, we conducted experimental work to assess the technological feasibility of a digital euro.

Our experimentation revealed that existing infrastructure, such as that used by the Eurosystem for instant payments – TARGET Instant Payment Settlement (TIPS) –, as well as distributed ledger technology, could be scaled up to process the roughly 300 billion retail transactions carried out in the euro area each year.

This experimental work also allowed us to identify possible options to protect privacy, ranging from segregating data to using cryptographic techniques.

And finally, our experiments showed that the energy needed by the settlement infrastructure we used is negligible compared with the energy consumption and environmental footprint of crypto-assets such as bitcoin, which uses more electricity than Greece or Portugal alone^[3].

A summary of the main findings of our experimentation has been published today^[4], and the detailed results will be shared by the NCBs in the coming weeks.

But while all these steps have shed light on the possibilities of a digital euro, many questions still need to be answered.

Money and payments permeate our everyday lives and underpin the economy. Any changes stemming from technological innovation, if not properly designed, can become a source of disruption for our financial systems, economies and societies.

Designing a new form of central bank money will involve defining operational and technological requirements and identifying the preferable options. For example, between possible ways to ensure that the digital euro is used as a means of payment rather than as a form of investment, with a view to preserving financial stability. Or between a centralised ledger, which could be easier and more efficient to handle, a distributed ledger, which may be better suited to peer-to-peer transactions, and/or local storage on a user’s device, which would enable offline payments. These aspects all have a bearing on one another. Making a coherent set of choices will be key to a smoothly functioning system.

This is the backdrop to our decision to launch a digital euro project, starting with two years of investigative work on the design that a digital euro should have. It will involve focus groups, interaction with financial intermediaries, prototyping and conceptual work. We will engage with all stakeholders. And we will continue to interact closely with other European institutions to define the necessary legislative framework. The European Parliament, the European Commission, the European Council and the Eurogroup have all recognised the importance of the digital euro for an innovative financial sector and resilient payment systems, and they have encouraged the Eurosystem to continue its work.^[5]

Our aim is to be ready, at the end of these two years, to start developing a digital euro, which could take around three years.

A digital euro will be successful if it adds value for everybody involved – citizens, merchants and financial intermediaries. We want to design the digital euro to be such a success.

The Eurosystem will drive this project forwards with the necessary degree of caution, inherent in our mandate to provide stability – both monetary and financial. But we will not shy away from writing this new page of European progress.