Will our euro notes be replaced by a digital currency? BCE is thinking about it and carrying out initial consultations.
Patrice Fritsch, Principal Partner / Monika Swaczyna-Pruchnik, Business Consulting Manager & Clément Robert, Manager Payment Services – EY Luxembourg
Can you tell us about the concept of a digital euro and its purpose?
The purpose of a digital euro is to provide citizens with safe, immediate, and accessible digital payments. It would offer the certainty of storing EUR in digital wallets that are fully secured and backed by the European Central Bank (ECB) itself.
Digital euro could be used to execute payments both at point-of-sell by replacing the usage of cash and existing online payments by avoiding the use of bank transfers or of debit/credit cards. It could also facilitate immediate cash transfers for individuals and/or companies.
Last October, the ECB issued a consultation paper on the concept of a digital euro. Digital euro is a Central Bank Digital Currency (CBDC) representing public money in a digital form. It is supposed to leverage technology and become an alternative payment method that would coexist at par-value with cash.
Although the idea of a digital euro is recent, a study by the Bank for International Settlements (BIS) from January 2020 shows that 80% of central banks are already engaged in some form of digital currency related research or testing phase.
What are the benefits and risks of the digital euro?
A digital euro could bring many benefits to the population as it would grant greater usability, speed and safer payments transactions. It could also enhance digital inclusion, facilitate monetary policy implementation, and help protect against frauds and thefts. Being issued by the ECB and supposed to be not more expensive than the use of cash, it would be a cost-efficient payment solution for individuals and businesses with limited interchange fees, if any.
Depending on the chosen distribution model, a digital euro could also bring synergies among market participants. By including banks and other financial institutions into the digital euro ecosystem, it would help create new business opportunities as product distributor, marketing agent, settlement agent or by providing user identification services (such as AML/KYC) and transaction monitoring.
However, some of the attention points that should be addressed before the release of the digital euro to ensure the stability of the financial system include:
- it should not cause an outflow of deposits from the banking sector and therefore not raise liquidity risks. It should also not impact banks’ lending capabilities;
- delegating administrative obligations such as AML/CTF to the current banking players or Fintechs should not cause operational strains;
- even if IT, administrative, and operational transformation will be needed, technological needs to operate, control and use of the digital euro should not cause a rise of related risks. In fact, stakeholders might have to undergo IT, administrative, and operational transformation to adapt to the digital euro.
What are the next steps?
It is planned that a decision to launch a digital euro project will be taken by mid-2021. On the 14th April the ECB has shared the results of its public consultation. The results show a strong attention towards privacy, security, usability throughout the euro area, absence of additional costs and offline usability.
The ultimate design of the digital euro lies with the ECB that will take the public consultation into consideration and look into various possibilities, including use of distributed ledger, definition of spending limits, use of a device for transfers and payments, online/offline capabilities, or availability of cross-border transactions outside Europe.
It is still a concept, but it would be surprising that a digital euro wouldn’t be approved soon for emission testing and distribution to the public. In the current pandemic, success of such alternative payment method could be immediate as users became much more enthusiastic about digital means of payments. There is no doubt it will be a fascinating exercise and a potential game-changer in the way we pay in the eurozone.