Electronic transfers

The ECB moves closer to the digital euro

The headquarters of the European Central Bank (ECB) in Frankfurt am Main, western Germany. Photo: AFP / DOSSIER


The headquarters of the European Central Bank (ECB) in Frankfurt am Main, western Germany. Photo: AFP / DOSSIER

The European Central Bank moved closer to a “digital euro” on Wednesday with the official launch of a pilot project, but questions remain about the pitfalls and potential benefits for eurozone citizens.

The move comes as the coronavirus pandemic has accelerated the abandonment of cash and central bankers around the world nervously follow the rise of private cryptocurrencies like bitcoin.

Here’s a look at what a digital euro would mean for the 19-nation club.

A digital euro, sometimes called “e-euro”, would be an electronic version of euro banknotes and coins. For the first time, it would allow individuals and businesses to make deposits directly with the ECB.

It could be safer than with commercial banks, which can go bankrupt. The ECB has promised that any future digital euro will be “a quick, easy and secure way” to make payments. The service would be free and payments could be made by card or smartphone app.

This would allow the Frankfurt-based institution to challenge the dominance of foreign payment card companies like Mastercard and Visa in the eurozone.

A digital euro would “complement cash, not replace it,” the ECB said. The ECB is still studying which technology is best suited to develop the digital currency.

The Covid-19 pandemic has accelerated the decline in cash use as customers try to avoid contact. And the ECB is reluctant to fall behind on virtual money issued by private players like bitcoin and Facebook’s launch diem, formerly known as balance.

There is also pressure to keep up with digital currency projects launched by other central banks, before the ECB misses the mark and consumers end up putting their money elsewhere.

If eurozone residents were to switch en masse to virtual currencies that operate beyond the reach of the ECB, it could hamper the effectiveness of its monetary policy measures and undermine financial stability.

ECB President Christine Lagarde said the aim was to “ensure that in the digital age, citizens and businesses continue to have access to the most secure form of money, the central bank “.

China’s central bank has already started testing with a digital renminbi, while the Bank of England has created a task force to research a possible ‘britcoin’.

he US Federal Reserve and the Bank of Japan are also studying Central Bank Digital Currencies (CBDCs).

Citizens could avoid traditional accounts in favor of the digital switchover, weakening retail banks in the euro area.

The risk would be higher in times of crisis, when savers might be tempted to flee to the security of a digital euro and trigger a run on the banks. To avoid this, the ECB could cap the number of e-euros people could hold in digital wallets. .

ECB board member Fabio Panetta on Wednesday gave the example of a threshold of around 3,000 euros ($ 3,500), but said the final figure would be discussed over the next two years.

The ECB will also need to balance privacy requirements with anti-money laundering regulations, with experts saying it is unlikely that a digital euro can offer the same kind of anonymity as cash.

A key challenge that could emerge is that users “should be convinced to switch to a new payment method that is hardly different from existing ones,” said Heike Mai, analyst at Deutsche Bank.

Not anytime soon. After completing a preliminary research phase and a public consultation, the ECB’s green light to move up a gear will launch a two-year “investigation phase” focusing on design and distribution options for the digital euro .

Experts will also study any legislative changes that may be necessary. Germany and France said the introduction of a digital euro would be “conditional on a political decision, to be taken by member states”.

Panetta said that if the digital currency receives the green light after the IP, the implementation phase will take another three years, meaning deployment is not expected until 2026.

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