The digital euro – do we need it?

Why is the introduction of a digital euro even being considered? Burkhard Balz, Member of the Executive Board of the Deutsche Bundesbank, explains what a digital euro would mean for citizens: “It’s about having a third form of money.”  There are currently two forms used in Europe: cash, which is passed on physically, and money in accounts at commercial banks, which is transmitted using several modern payment systems. “The digital euro would be a third form of money which, like cash, would allow us to pay directly, but digitally. For instance, I could send ten euros to my neighbour over the fence using my smartphone. There are processes in the industries which could allow payments to be made from machine to machine in future, and the digital euro would be ideal for that”, Balz added. According to the European Central Bank (ECB), a digital euro could support the European economy’s transition into the digital age and actively promote innovations in retail payment services. 

Why now?

”Time is of the essence”, claim the proponents of digital currencies, whereas sceptics warn: “Don’t be too hasty”. Germany’s digital association, Bitkom, has expressed concerns that Europe could be left behind on the global stage if digital currency becomes a reality, and calls for much greater urgency in testing the digital euro.  But what’s behind all this? Back in summer of 2020, China started issuing its digital Renminbi (also known as e-CNY) to selected employees of state-owned companies. Since autumn 2020, the digital currency has been subject to field research in around 3,400 shops in the mega-city of Shenzhen, home to the headquarters of smartphone giant, Huawei. The debate is also being heated up by the topic of private stablecoins such as Facebook’s Diem.

In a study by the Bank for International Settlements (BIS) , the global umbrella organisation of the central banks, 80% of the 66 central banks surveyed deal in state-operated Central Bank Digital Currencies (CBDC). The study also found that one in five central banks expect to introduce a digital currency for private use within the next six years. In light of crypto currencies from private providers and plans in places like China for digital central bank money, Europe “can’t afford to wait any longer” or “remain hesitant”, Federal Minister of Finance, Olaf Scholz, said in 2020. “We need to forge ahead instead of lagging behind. If Europe wants to maintain its sovereignty in the retail payments landscape, it must actively address the opportunities and risks of a digital euro.” Jede fünfte Zentralbank geht demnach davon aus, dass sie in den nächsten sechs Jahren eine Digitalwährung für den Privatgebrauch herausbringen wird.  Angesichts von Kryptowerten privater Anbieter und Plänen etwa in China für digitales Zentralbankgeld könne Europa „nicht mehr abwarten“ und „zögerlich bleiben“, forderte Bundesfinanzminister Olaf Scholz im Oktober 2020: „Wir dürfen nicht hinterherhinken, sondern müssen voranschreiten. Wenn Europa seine Souveränität im Massenzahlungsverkehr bewahren will, muss es sich mit den Chancen und Risiken eines digitalen Euro aktiv befassen.“

The central banks have been grappling with the advantages and disadvantages, as well as the practical and technical organisation of CBDC. For example, the Swedish central bank, Sveriges Riksbank initiated a test phase with a “technical solution for the e-krona”  based on DLT, which is due to last until 2021. Countries such as Australia, Estonia, France and Thailand are currently developing plans for a digital central bank currency based on Ethereum.

ECB conducts tests and discussions

Whether or not Europe needs a digital euro is a fundamental issue confronting the ECB and the national central banks in the eurozone right now. The Eurosystem task force, composed of experts from the ECB and the 19 national central banks of the eurozone, has identified possible scenarios that would require the introduction of a digital euro. One such scenario would be increased demand for electronic payment methods in the eurozone necessitating a riskless European digital payment method. A significant reduction of use of cash for payments in the eurozone would be another of these situations. Other examples include the introduction of a global, private payment method which could be questionable from a regulatory standpoint and pose risks to financial stability and consumer protection, as well as the proliferation of digital central bank money issued by other central banks. 

In autumn 2020, ECB President Christine Lagarde, said: “We should be prepared to issue a digital euro, should the need arise.”   Member of the ECB's Executive Board, Fabio Panetta, added: “A digital euro would also protect us from the potential for a public or private digital means of payment, issued and controlled from outside the euro area, to largely displace existing payment method.”  François Villeroy de Galhau, head of France’s central bank, pointed out that Europe faces “urgent strategic decisions” as regards the payment sector. Europe cannot afford to fall behind in terms of digital central bank money. 

In October 2020, the ECB published a report  assessing the advantages, disadvantages and design possibilities of a digital currency. In the foreword, Lagarde wrote: “A digital euro would be introduced alongside cash, it would not replace it. A digital euro would create synergies with private payment solutions and contribute to a more innovative, competitive and resilient European payment system. It is still too early to commit to a specific design of a digital euro. But it is clear that any type of design must fulfil a number of principles and requirements identified in this report – including accessibility, robustness, safety, efficiency and privacy – while complying with relevant legislation.”

For now, the ECB remains undecided on whether a digital euro should be introduced and, if so, when. After carrying out consultations with the public, it aims to decide in mid-2021 whether it will start a project on this. Although the ECB does not yet want to commit to a specific design, it pointed out in the report that a digital euro should not to be seen as crypto-currency nor merely as a stablecoin: According to Ulrich Bindseil, Director General of the ECB's Directorate General Market Operations, it wouldn’t be possible to introduce digital central bank money until “at least four or five years” after any resolution to introduce a digital euro.  Conversely, Thomas Heilmann, digital entrepreneur and member of the German parliament for the CDU, believes that it would be possible to introduce a digital currency “within a few months” as “none of it is that technically complicated”. However, this would first require “the central banks to decide that we want to do it”.  Green politician Danyal Bayaz, who serves as State Minister of Finance for Baden-Württemberg, welcomed this development on the EU level: “This is not just about public confidence, but also about industrial policy and European sovereignty in the face of Chinese and US aspirations."  

Bundesbank also analyses the situation

The discussion about the digital euro is also a high priority for the Deutsche Bundesbank - Diem was a wake-up call, according to Bundesbank Executive Board member Burkhard Balz. However, he stressed that many questions remain unanswered, mainly regarding the potential risks. Bundesbank cannot yet be certain whether or not the risks arising from the issuance of digital central bank money would ultimately be greater than the benefits generated.  

Bundesbank President Jens Weidmann warned against introducing digital central bank money too rashly. He emphasised the importance of first establishing the positives and negatives of digital central bank money and then deciding whether it is necessary.  Bundesbank Executive Board member Burkhard Balz reiterated this message in a speech in October 2020:  ”Introducing CBDC is initially a political decision. Therefore, it is necessary to conduct comprehensive conceptual analysis and assessment of CBDC in comparison with other options, and regarding the impact on society as a whole.”  

The chief economists of the Sparkasse Finance Group also advocate for careful consideration and emphasise that questions regarding the digital euro remain unanswered.  The National Association of German Cooperative Banks (BVR) sees no added value at all in electronic central bank money.  The German Banking Industry Committee currently sees no need to prioritise the introduction of CBDC in the eurozone.  On the other hand, one of its members, the Association of German Banks (BdB), has called for it to be introduced more quickly in order to protect digital sovereignty. 

The many requirements for a digital euro

This kind of project presents various requirements and challenges. ECB experts and the national central banks of the eurozone have set out a series of fundamental requirements for the digital euro.  For example, it must be easily accessible, robust, secure and efficient. Furthermore, it must comply with current legislation while being compatible with the solutions of private payment service providers. It is also vital to consider the importance of protecting privacy. This sentiment is shared by most of the European citizens who took part in the ECB’s public consultation on the digital euro in late-2020. Of the over 8,000 participants in the online survey, 41% would like data protection to be the most prioritised design feature of a potential digital euro, followed by security (17%) and Europe-wide availability (10%). 

Last but not least, many other unresolved questions must be answered. These include how and where the digital money would be stored securely in the long term, how dependence on a single technology can be avoided and how the legal and EU-wide regulatory framework must be designed. There are other exciting debates around whether the digital currency should be hardware-based, usable internationally and offline, anonymous and centralised or decentralised.

Conclusion

It remains to be seen whether and when the digital euro will be introduced, and how it would be designed. What is clear, though, is it is being intensively pursued, discussed and tested.