The digital euro project
The European Central Bank (ECB) has entered the planning and investigation stages of a digital Euro project. They have solicited input from citizens and financial institutions and conducted extensive analysis of various aspects of this potential new currency. Here, we discuss the basic elements of the project and potential implications of launching it.
What is the digital euro project?
The goal of this project is to develop a central bank digital currency (CBDC) that will offer a safe, affordable, contactless form of payment. It will increase accessibility to digital currency without having a major impact on financial stability or monetary policy. The digital Euro is designed to be implemented alongside physical central bank currency, not to replace it.
The current project includes four basic phases of planning:
Preliminary experimentation phase: This was the preliminary phase of testing the idea to see what its impact could be, and has been completed. This phase included soliciting input from various sources including citizens and financial institutions. It also included testing various design concepts to ensure they would work in the desired scenarios.
Investigation phase: The phase during which the ECB will consider key issues regarding design and distribution. A digital Euro must meet the needs of citizens without having a negative impact on the Eurosystem as a whole.
Experimentation phase: Once the digital Euro is designed, it will be tested in a variety of scenarios to ensure that it is efficient and secure. This phase will focus on the technical part of the Eurosystem and how digital Euros can fit into it. This includes integration into merchants for both retail and online merchant account services.
Determination: At the conclusion of the above-referenced phases, the ECB will make a judgement on whether or not to move forward with the actual development of the digital Euro.
Benefits of the digital euro project
There are a variety of benefits that could be reaped from the implementation of a digital Euro. Here are some of the big ones to consider.
- Increased independence of the European economy by offering a digital central bank currency to its citizens that can be used globally
- Provide a more sustainable option for the use of central bank currency as the use of cash continues to decline in favor of digital forms of payment
- Allow the Eurosystem to make adjustments to monetary policy using the digital Euro as a direct transmission option
- Help protect the Eurosystem from outside threats to its stability
- An alternative form of payment that can be used in the event of a natural disaster or other emergency that renders traditional payment systems inoperable
- Ability to offer a more efficient, digital payment type that can be used for international transactions
- Will make improvements to and expansions of the Eurosystem’s footprint much easier by using a digital currency, rather than the need for mass production of physical currency
When will the digital euro go into Effect?
The digital Euro Project is expected to be complete and ready for implementation in 4-5 years. The current phase of the project is expected to last 24 months in total. After that time, the project will move into the experimental phase. Once that is concluded, the ECB will convene to make a decision on whether or not to continue moving forward into the design and ultimately distribution phases.
The investigation phase is a critical part of the development of the digital Euro and will address a number of important factors. The largest piece of the puzzle is how to design the digital Euro to meet the needs of its users while simultaneously keeping it secure.
In addition to design and security, this phase will dig deeper into the legal implications of a digital Euro. The ECB will specifically consider whether or not there will be changes to existing policies, or if new ones need to be written. This will span across multiple sectors and levels of government.
Last but not least, the ECB will need to consider the role that banks will play in the distribution and processing of digital Euros. The launch of a CBDC will likely have a huge impact on the market, the economy, and how businesses must operate. Banks are one of the key players in this scenario and will have to be involved in the process.
Overall, the Digital Euro Project has shown some promising results so far. The initial report after preliminary experimentation was favorable for a variety of reasons. It will be interesting to see where the project goes and how a potential digital Euro will change the infrastructure of the Eurosystem.