Digital Euro Preparations Gain Momentum

Posted on Jun 27, 2024 by Piet Mallekoote, Former Member of the Digital Euro Market Advisory Group, European Central Bank

Global focus on central bank digital currency increases

Since 2020, the focus on central bank digital currency (CBDC) has increased significantly. Retail CBDC is on the agenda of more than 100 central banks, while wholesale CBDC is being explored by over 20 central banks (Kiff). More than half of the central banks are doing experiments or conducting a CBDC pilot (Kosse and Mattei). Three retail CBDC systems are now live: The Bahamas, Jamaica and Nigeria. Large-scale pilots are being conducted in China, while the United States is lagging behind, partly due to political headwinds and the recently passed CBDC Anti-Surveillance State Act.

Digital euro on the move

Substantial progress has been made in the euro area in recent years with preparations for a digital euro. A decision to introduce it depends on political decision-making. Former European Central Bank (ECB) Member of the Executive Board Fabio Panetta and his successor, Piero Cipollone, have communicated transparently on the project's progress in recent years (ECB digital euro pages). Following this, a number of Eurosystem central bank governors have recently called attention to the importance of the digital euro, with the arguments to be discussed below at their core (Hernández de Cos, Knot, Nagel, Panetta, and Beau).

This article highlights the background of the digital euro project and provides an overview of the state of play and challenges.

Declining use of cash a key driver of the digital euro ... but increasing geopolitical fragmentation is too

The purpose of the digital euro is threefold:

  • First of all, in the ongoing digitalisation of the economy, the ECB wants to ensure the role of and sufficient availability of public money. The use of cash has been declining for years, and the ECB wants to continue to provide a public anchor of trust and stability with the digital euro. This anchor guarantees the one-to-one exchange of private money.
  • Second, increasing geopolitical fragmentation in the world is a source of concern for the ECB. Therefore, strengthening the single market is a key priority. In this context, Enrico Letta recently advocated for the importance of a “rapid” introduction of the digital euro. European autonomy and sovereignty that provide for European governance for payments is essential in this respect. Currently, 64% of the number of card transactions in the euro area are provided by international card schemes, and 13 of the 20 euro area countries do not have a national card scheme. This weakens European autonomy and competition and can make the system vulnerable to external disruptions. This also applies to the impact of (potentially) global developments on Europe from big techs, stablecoins and foreign digital currencies. The ECB's ambition is to make the digital euro future-proof, whereby the euro can continue to play a significant role in the progress of the digital evolution and ensure resilience.
  • Third, the digital euro reduces the fragmentation of national payment solutions. While national payments markets are efficient in themselves, this efficiency does not exist on a pan-European scale without using non-European providers. Attempts to achieve a European card (and an online) scheme have never succeeded (the ECB spoke of "the black hole" in that context), unlike, the European-wide SEPA Credit Transfer (SCT), its instant variant (SCT Inst) and Direct Debit (SDD). With the digital euro, the ECB wants to aim for widely usable payment instruments that can be used anywhere in the euro area at the Point of Interaction (POI), with its own European governance. The digital euro solves this fragmentation and provides a platform for innovation. National innovations can be used across Europe by citizens through the digital euro platform.

Private initiatives alongside public initiatives

Meanwhile, private initiatives also exist to reduce fragmentation. For example ...

Read more in the CBPN Members' Library with your annual subscription.

No part of Central Bank Payments News may be reproduced, copied, republished, or distributed in any form or by any means, in whole or in part, without the express and prior written permission of the publisher, Currency Research Malta, Ltd.