Blog post by Fabio Panetta, Member of the Executive Board of the ECB...We are entering the age of digital money. Much like commodity or representative money in the past, digital money is emerging in response to changes in society and technology.
Today, digitalisation is reaching all areas of
our lives. The coronavirus (COVID-19) pandemic has shown just how fast
such change can happen. And this is affecting the way we pay. We are
increasingly buying digitally and online. The role of cash as a means of
payment is declining.
Private solutions for digital and online payments bring important
benefits such as convenience, speed and efficiency. But they also pose
risks in terms of privacy, safety and accessibility. And they can be
expensive for some users. Digital payments are still used more by
consumers with higher incomes, whereas the preference for cash is higher
among those with lower incomes, reflecting its essential role for
financial inclusion.
Central banks cannot ignore these developments. Over many centuries,
the sovereign has provided its own currency to citizens as a symbol of
stability, safety and trust. Providing money as a public good is central
to the mission of central banks.
Given the digital transformation under way, which has the potential
to transform the payments landscape and even the entire financial
system, central banks must be bold and keep up with the pace of change.
Today, the Governing Council of the European Central Bank has
therefore decided to formally launch a project to get ready for the
possible issuance of a digital euro. In concrete terms, this means that
we will commit the resources necessary to design a marketable product.
But a decision about whether or not to issue a digital euro will only
come at a later stage. And in any event, a digital euro would complement
cash, not replace it.
The launch of this project today follows on from the exploratory work we have done so far.
Our first step – the Eurosystem’s report on a digital euro – laid
the groundwork and identified the rationale for potentially issuing a
digital euro.
People living in the euro area have costless access to a safe and
universally accepted means of payment in the form of cash. But this
should also be true for digital and online payments. A digital euro
would reduce the cost of transactions. It would foster financial
inclusion by aiming to make digital payments available to those who
currently don’t have access to financial services. And it would enable
users to make their purchases across all outlets and countries in the
euro area.
A digital euro would also provide safety. Just like cash, a digital
euro would be a direct claim on the central bank and would therefore
have no risk – no liquidity risk, no credit risk, no market risk.
Being offered by the central bank – which has no commercial interest
in monetising the data of users – the digital euro would help to
protect people’s privacy against commercial usage or unjustified
intrusion. An appropriate, transparent governance set-up that complies
with European regulation on data protection would further guarantee that
users’ personal data are only accessible to legitimate authorities,
with a view to preventing illicit activities such as money laundering or
terrorist financing.
A digital euro would level the playing field and encourage
innovation by enabling competing providers – large and small – to build
on it. By providing services with “digital euro inside”, European
intermediaries would be in a position to strengthen the services they
offer to their customers and stay competitive even as global tech giants
expand into payments and financial services. And central bank money
would remain at the heart of the payment system, strengthening Europe’s
autonomy in the age of digital money.
Our second step, after publishing the Eurosystem report, was to hold
a public consultation. We received a record level of feedback,
revealing a considerable interest from Europeans in these potential
benefits. It also showed that the most important features of a digital
euro for households and firms are privacy, security and broad usability.
In parallel, together with the national central banks (NCBs) of the
euro area, we conducted experimental work to assess the technological
feasibility of a digital euro.
Our experimentation revealed that existing infrastructure, such as
that used by the Eurosystem for instant payments – TARGET Instant
Payment Settlement (TIPS) –, as well as distributed ledger technology,
could be scaled up to process the roughly 300 billion retail
transactions carried out in the euro area each year.
This experimental work also allowed us to identify possible options
to protect privacy, ranging from segregating data to using cryptographic
techniques.
And finally, our experiments showed that the energy needed by the
settlement infrastructure we used is negligible compared with the energy
consumption and environmental footprint of crypto-assets such as
bitcoin, which uses more electricity than Greece or Portugal alone.
A summary of the main findings of our experimentation has been published today, and the detailed results will be shared by the NCBs in the coming weeks.
But while all these steps have shed light on the possibilities of a digital euro, many questions still need to be answered.
Money and payments permeate our everyday lives and underpin the
economy. Any changes stemming from technological innovation, if not
properly designed, can become a source of disruption for our financial
systems, economies and societies.
Designing a new form of central bank money will involve defining
operational and technological requirements and identifying the
preferable options. For example, between possible ways to ensure that
the digital euro is used as a means of payment rather than as a form of
investment, with a view to preserving financial stability. Or between a
centralised ledger, which could be easier and more efficient to handle, a
distributed ledger, which may be better suited to peer-to-peer
transactions, and/or local storage on a user’s device, which would
enable offline payments. These aspects all have a bearing on one
another. Making a coherent set of choices will be key to a smoothly
functioning system.
This is the backdrop to our decision to launch a digital euro
project, starting with two years of investigative work on the design
that a digital euro should have. It will involve focus groups,
interaction with financial intermediaries, prototyping and conceptual
work. We will engage with all stakeholders. And we will continue to
interact closely with other European institutions to define the
necessary legislative framework. The European Parliament, the European
Commission, the European Council and the Eurogroup have all recognised
the importance of the digital euro for an innovative financial sector
and resilient payment systems, and they have encouraged the Eurosystem
to continue its work.
Our aim is to be ready, at the end of these two years, to start developing a digital euro, which could take around three years.
A digital euro will be successful if it adds value for everybody
involved – citizens, merchants and financial intermediaries. We want to
design the digital euro to be such a success.
The Eurosystem will drive this project forwards with the necessary
degree of caution, inherent in our mandate to provide stability – both
monetary and financial. But we will not shy away from writing this new
page of European progress.
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