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ECB expected to move ahead with digital euro pilot project

By DW News
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Frankfurt, July 14: The governing council of the European Central Bank (ECB) is meeting Wednesday to decide whether to move ahead with a pilot project exploring the benefits and risks of introducing a digital version of the euro.

ECB expected to move ahead with digital euro pilot project

A digital form of the currency used by the 19 countries in what is known as the eurozone could provide an alternative to third-party payment services and cryptocurrencies like Bitcoin. Interest in cryptocurrencies has exploded in recent years. But central bankers fear the widespread use of foreign or unregulated currencies could destabilize the economy.

The project, which is likely to be approved, is pegged to last around two years.

Playing catch-up

The ECB has stressed that a digital euro would not replace the physical euro. Rather, it would be used alongside it as an additional form of online payment, providing for faster digital transactions that don't rely on powers outside the bloc.

China has been testing a digital version of the Chinese yuan since last year, and cryptocurrencies like Bitcoin have gained growing institutional acceptance around the globe. Both of these developments, along with a decline in the use of cash, pose a threat to economic stability in Europe, some fear.

"Wide acceptance of a means of payment or store of value not denominated in euro could weaken or even impair the transmission of monetary policy in the euro area," the ECB wrote in its "Report on a digital euro" released in October 2020.

"In such circumstances, issuance of a digital euro could support European sovereignty and stability, in particular in the monetary and financial dimensions," it said.

A tall order

The pilot phase will help determine what a digital euro and its supporting infrastructure could look like.

"You really have to look into all the technicalities, the design, how you make sure that the banking sector is really part of the story," ECB President Christine Lagarde said in an interview with Bloomberg in the days ahead of the decision.

Determining how to integrate a digital offering into the existing financial system will be a key aim of the test phase.

"A digital euro could hamper the activity of banks or generate instability in times of financial stress," Ulrich Bindseil, director general for market infrastructures and payments at the ECB, told DW in October. "But a properly designed digital euro can address these risks."

A digital euro should also have the efficiency and anonymity of cash, no transaction fees and provide offline functionality in case of extreme events like cyberattacks or natural disasters, according to the ECB's digital euro report.

Like the physical euro, a digital version would be issued by Eurosystem — the ECB and the national banks of countries in the euro area. The ECB has stressed on its website that a digital euro would be distinct from crypto-assets, which have no public institution backing them and are prone to price volatility. A digital euro would be as stable as the physical euro.

Balancing security and privacy

The ECB president said that data privacy is a key concern that needs to be taken into account in developing a digital euro.

"At the same time," Lagarde told Bloomberg, "we need to make sure that it's not accelerating money laundering or the financing of terrorism."

The ability to exchange cryptocurrencies anonymously has made them popular with criminals. Another objective of the pilot project will be determining how to provide citizens with privacy without facilitating criminal activity.

Throughout the two-year exploratory phase, the ECB's governing council will rely on input from the European Commission, ministers of finance, and the parliaments of eurozone member states, among others, to determine whether to move ahead with this new form of currency.

"It's not a given yet," Lagarde said.

Source: DW

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