On July 14, 2021, the Governing Council of the European Central Bank (ECB) announced that it would start a 24-month long investigation phase of a project to implement a Central Bank digital currency (CBDC), a digital euro. The investigation phase will explore the possible functional design of a digital euro, the cases in which it would be used, changes to the European Union legislative framework that would be needed to adopt the digital euro, and the prospective impact of the digital euro on the market. The investigation will also seek to define a business model for supervised intermediaries within the digital euro ecosystem. During the investigation phase, the joint technical work of the ECB and the European Commission regarding a broad range of policy, legal, and technical questions stemming from a possible digital euro will be intensified. Learnings from the experimentation work performed by the ECB and the euro-area national central banks from September 2020 until June 2021 will be taken into account in the investigation phase. A digital euro would complement cash and not replace it. However, no final decision on whether to issue a digital euro has been made.
Background on Central Bank Digital Currencies
There is no official definition of a CBDC. The Bank for International Settlement (BIS) defines it as a “digital form of central bank money that is different from balances in traditional reserve or settlement accounts.” Generally, CBDCs have the following three characteristics. They are
- electronic money issued by the central bank,
- denominated in the national unit of account, and
- a liability of the central bank.
A 2021 survey of 65 central banks conducted by the BIS found that 86% of the survey participants were actively researching the benefits and drawbacks of CBDCs, with 60% conducting experiments or proofs-of-concept and 14% moving forward to development and pilot projects. The Central Bank of The Bahamas was the first central bank worldwide to launch a retail CBDC, the Electronic Bahamian Dollar (“Sand Dollar”), on October 20, 2020.
Digital Euro Project Timeline
In October 2020, the Eurosystem High-Level Task Force published its report on a digital euro. It defined a digital euro as “a liability of the Eurosystem recorded in digital form as a complement to cash and central bank deposits” for use in retail transactions available to the general public. The report identified four possible scenarios that would require the issuance of a digital euro: an increased demand for electronic payments in the euro area, a significant decline in the use of cash as a means of payment, the launch of global private means of payment that might raise regulatory concerns and pose risks, and a broad take-up of CBDCs issued by foreign central banks (digital dollarization). In April 2021, the ECB published a public consultation report. The investigation phase started on July 14, 2021, and will last 24 months. A final decision on whether to issue a digital euro will be made after the conclusion of the investigation phase. European policymakers, citizens, merchants, and the payments industry will be involved in the discussion.