The European Central Bank (ECB) announced in July 2021 the launch of the investigation phase for a digital euro project, marking a significant step towards modernizing the Eurozone’s financial infrastructure. This decision, supported by Eurogroup President Paschal Donohoe, follows nine months of in-depth analysis and experimentation, signaling the ECB’s commitment to ensuring citizens and businesses have access to the safest form of money in the digital age. ECB President Christine Lagarde highlighted that this project aims to keep central bank money relevant and accessible to the public in an increasingly digital economy.
Delving into the 24-Month Digital Euro Investigation Phase
This investigative stage, set to span 24 months from 2021, is crucial for addressing fundamental questions surrounding the design and distribution of a potential digital euro. The ECB is prioritizing a digital currency that not only caters to the diverse needs of European users but also proactively mitigates risks such as illicit activities and potential disruptions to financial stability and monetary policy. It’s important to note that this phase does not predetermine the issuance of a digital euro; that decision will be made at a later stage. Furthermore, the ECB has clarified that a digital euro is envisioned to complement cash, not replace it, ensuring inclusivity and choice in payment methods.
ECB Board Member Fabio Panetta, who chairs the High-Level Task Force on a digital euro, emphasized the collaborative approach the ECB will take. He stated that the ECB will actively engage with the European Parliament, European decision-makers, citizens, merchants, and the payments industry throughout this investigation phase to gather diverse perspectives and ensure the project aligns with the needs of all stakeholders.
User-Centric Design Approach for the 2021 Euro Digital Currency
A core focus of the investigation phase is to develop a functional design for the digital euro that is firmly grounded in user needs. The Eurosystem will employ various methods, including focus groups, prototyping, and conceptual studies, to thoroughly explore user preferences and requirements. The primary objective is to define the use cases that a 2021 Euro digital currency should prioritize to function as a riskless, easily accessible, and efficient form of digital central bank money. This user-centric approach aims to ensure the digital euro is practical and readily adopted by individuals and businesses across the Eurozone.
Regulatory Framework and Market Impact Assessment for the Digital Euro in 2021
The project also encompasses a comprehensive examination of the existing EU legislative framework to identify any necessary adjustments to accommodate a digital euro. These potential legislative changes will be discussed and decided upon in collaboration with European co-legislators. The ECB will maintain open communication and engagement with the European Parliament and other policymakers throughout the investigation. Simultaneously, the technical collaboration between the ECB and the European Commission on the digital euro will be intensified to ensure alignment and synergy.
Furthermore, the investigation will rigorously assess the potential impact of a digital euro on the financial market. This includes identifying design options that safeguard user privacy and minimize risks for citizens, financial intermediaries, and the broader euro area economy. Defining a viable business model for supervised intermediaries within the digital euro ecosystem is also a key objective. To ensure that the perspectives of prospective users and distributors are considered, a dedicated market advisory group and the Euro Retail Payments Board will be actively involved throughout the investigation phase.
Positive Outcomes from Preliminary Digital Euro Experimentation in 2021
The investigation phase builds upon the encouraging results of extensive experimentation conducted by the ECB and euro area national central banks over the preceding nine months. These experiments involved collaborations with academia and the private sector and explored critical areas such as the digital euro ledger system, privacy and anti-money laundering measures, limits on digital euro circulation, end-user offline access, and inclusive access solutions. Importantly, these preliminary experiments did not identify any significant technical obstacles to the various design options considered.
Experiments demonstrated that both the Eurosystem TARGET Instant Payment Settlement (TIPS) and distributed ledger technologies, such as blockchain, are capable of handling transaction volumes exceeding 40,000 transactions per second. The findings also indicated the feasibility of hybrid architectures that combine centralized and decentralized elements, offering flexibility in the digital euro’s technical infrastructure.
Moreover, the experimental results suggest that a digital euro core infrastructure can be environmentally sustainable. The energy consumption required to process tens of thousands of transactions per second in the tested architectures was found to be negligible compared to the substantial energy consumption associated with crypto-assets like Bitcoin. These practical insights derived from the experimentation phase will serve as valuable inputs for the ongoing investigation.
Conclusion: Moving Forward with the 2021 Euro Digital Currency Project
The launch of the investigation phase for the digital euro project in 2021 represents a pivotal moment in the evolution of the Eurozone’s financial landscape. By prioritizing user needs, rigorously exploring design options, and proactively addressing potential risks, the ECB is taking a measured and comprehensive approach to assess the feasibility and desirability of a digital euro. The findings from this 24-month investigation will be instrumental in shaping the future of digital payments in Europe and ensuring that the euro remains fit for purpose in the digital age, complementing cash and providing citizens with access to a secure and efficient form of central bank money.
