D.he European Central Bank (ECB) will accelerate its work on developing a digital euro. The central bank submitted a report on Friday. A public consultation phase and an internal test phase will start on October 12th, which should last three months.
Thereafter, the Governing Council wants to deal with whether a specific project for the introduction of digital central bank money should be set up. That should be in the middle of next year. It will be a few more years before citizens can pay with the digital euro.
“People in Europe are increasingly paying, saving and investing electronically. Our job is to secure confidence in our currency. That is why we have to ensure that the euro is prepared for the digital age, ”said ECB President Christine Lagarde. “We should be prepared to introduce a digital euro should this become necessary.”
But before that, some questions still need to be clarified, as the Association of German Banks (BdB) called for in its statement. ECB board member Fabio Panetta referred to existing digital means of payment such as electronic transfers. “By contrast, we don’t have a digital currency that is issued by the central bank and that we can all use in everyday life. In other words: we are missing the digital counterpart to the euro banknotes. “
Answer to Facebook’s digital currency
In its report on the digital euro, the ECB made it clear that it did not want to compete with private providers. However, private payment service providers and commercial banks would be affected by the introduction of digital central bank money. Finally, the ECB and other central banks are responding to plans by private companies to introduce digital assets. Facebook’s Libra project is the best-known example, and the presentation of the plans was a wake-up call for the central banks to work on a digital form of money themselves.
Added to this is the fear that Europe will be left behind in new payment technologies. American payment service providers such as Mastercard, Visa and PayPal are already dominating the market. Chinese Internet companies such as Alibaba and Tencent, as well as Apple, Google and Facebook from the United States, are pushing for him. The Chinese central bank began developing a digital renminbi very early on, in 2014, which is already being tested in a number of cities.
The digital version of the Chinese currency is to be issued to tourists for the Olympic Winter Games in Beijing in 2022. In Europe, the Swedish Reichsbank has been checking the “E-Krona” for a long time. Cash only plays a very minor role in the country, with Swedes paying more than 80 percent with credit or giro cards. The ECB cites the significant decline in cash as a means of payment as one reason why it is now intensifying its work on the digital euro.
Banks fear their role
“With its position on digital central bank money, the ECB is sending out an important signal,” explained BdB Managing Director Andreas Krautscheid. The digital euro is a future issue with the greatest importance for the security and stability of the European financial markets, but which still has relevant issues to be clarified. “The first attempt at the digital euro has to be successful, otherwise we will be jeopardizing European sovereignty in matters of digital currency,” Krautscheid fears.
The discussion that now follows must ensure that banks have a central role in issuing a digital euro, demands the private banking association, which also includes Deutsche Bank and Commerzbank. Digital currencies can be similar to Bitcoin if they are based on a so-called blockchain, i.e. on a chain of data blocks that expands with each transaction. Another alternative is a digital means of payment that is based on a type of credit, a so-called token.
In this form, the digital euro could also be exchanged offline, for example via a Bluetooth connection between smartphones. The ECB wants to deal with both variants.
Such an electronic form of central bank money could be used by the general public – just like cash, only in digital form. “A digital euro would be a supplement to cash, not a substitute,” said ECB Director Panetta. In any case, the Eurosystem will continue to issue cash, assured the ECB.
Bundesbank President Jens Weidmann recently pointed out the risks of digital central bank money. In a banking crisis, for example, there could be a “digital bank run” if customers withdraw their deposits from the banks and transfer them to digital money. According to Weidmann, it is above all the task of private companies in a market economy to offer payment transaction solutions that are in demand by the public. The ECB, but also other central banks, consider secure and reliable payment instruments to be necessary for transactions in the digital economy.
Above all, banks and industry want a legally secure means of payment for the expansion of the “Internet of Things”, i.e. comprehensively digitized economic activity, in order to guarantee the smooth flow of production and trade. A digital euro can be the instrument for this, although the digitized payment systems are now working very quickly.
Therefore, the advantages of digital central bank money are not immediately apparent to the consumer, as he already has a selection of efficient and quick payment options with book money transactions such as card payments or real-time transfers. Digital central bank money would be an option that can be used to pay without the need for a payment system in between.