The European Central Bank (ECB) “moves up a gear” on its digital euro project
The City has the world-beating expertise, but will the BoE act fast and use this advantage?
Last month the European Central Bank announced the next phase in its ambition to move towards a Central Bank Digital Currency. It has decided to launch a digital euro project, following public consultations involving more than 8,000 responses from across the European Union.
“It has been nine months since we published our report on a digital euro,” said ECB President Christine Lagarde.
“In that time, we have carried out further analysis, sought input from citizens and professionals, and conducted some experiments, with encouraging results. All of this has led us to decide to move up a gear and start the digital euro project,” she continued.
“Our work aims to ensure that in the digital age citizens and firms continue to have access to the safest form of money, central bank money”.
Could the EU’s cumbersome procedures offer the UK a key first mover advantage?
The ECB have announced that the new ‘investigation phase’ will last 24 months and aim to address key issues regarding design and distribution. No decision has yet been made on the possible issuance of a digital euro, which will come only later.
The EU’s complex governance structures are inevitably going to slow down the entire process.
“We will engage with the European Parliament and other European decision-makers and inform them regularly about our findings. Citizens, merchants and the payments industry will also be involved”, said ECB Board Member Fabio Panetta, Chair of the High-Level Task Force on a digital euro.
During the project’s investigation phase, the Eurosystem will focus on a possible functional design and will involve focus groups, prototyping and conceptual work. This investigation phase will examine the use cases that a digital euro should provide as a matter of priority to meet its objectives.
Any Euro digital currency will need approvals from dozens of EU governments and EU players
The project will also shed light on the changes to the EU legislative framework which might be needed and that will be discussed with, and decided by, European co-legislators. The ECB says it will continue to engage with the European Parliament and other European policymakers throughout the project’s investigation phase. The technical work on the digital euro with the European Commission will also be intensified.
Finally, the investigation phase will assess the possible impact of a digital euro on the market, identifying the design options to ensure privacy and avoid risks for euro area citizens, intermediaries and the overall economy. It will also define a business model for supervised intermediaries within the digital euro ecosystem. A market advisory group will take account of prospective users’ and distributors’ views of a digital euro during the investigation phase. Those views will also be discussed by the Euro Retail Payments Board.
What has the ECB done so far?
During the past nine months of its consultation phase, experiments were conducted in the four following areas: the digital euro ledger; privacy and anti-money laundering; limits on digital euro in circulation; end-user access while not connected to the internet and facilitating inclusiveness with appropriate devices. No major technical obstacles were identified to any of the assessed design options.
Both the Eurosystem TARGET Instant Payment Settlement (TIPS) and alternatives such as blockchain were proven capable of processing more than 40,000 transactions per second. The experiments also suggested that architectures combining centralised and decentralised elements are possible.
According to these experiments, a digital euro core infrastructure would be environmentally friendly. For the architectures that were tested, the power used to run tens of thousands of transactions per second is negligible compared with the energy consumption of crypto-assets such as bitcoin.
The UK still has the opportunity to develop the western world’s first CBDC
China is already well ahead of the world when it comes to a Central Bank Digital Currency (CBDC). The Chinese digital Renminbi launches in February 2022 and will be used globally for Renminbi transactions including in the UK.
“A speedy wholesale-led Sterling CBDC could provide a massive global opportunity for the United Kingdom,” says the CityUnited Project’s Chairman, Professor Daniel Hodson.
“Any delay could gift our EU competitors the advantage. Global Britain and the City in particular have the resources, organisations, potential leadership and momentum, as well as the technical skills and innovation to create a successful sterling digital currency very quickly, if applied in a well organised and timely way.”