13 October 2021
The digital euro provides a risk-free and reliable currency for all Europeans
In July of this year, the European Central Bank (ECB) announced that they would be taking the next step towards the possible introduction of a digital euro. With this, the central bank wants to respond to the further digitalisation of society and give citizens and companies a public alternative for the digital money they currently have in accounts with commercial banks. To gain a better understanding of this new digital currency, we spoke to Sophie Cohen Tervaert. She is Head of Department Payments Policy at DNB, the Dutch Central Bank, and she is involved in the development of the digital euro, along with her department.
Why a digital euro?
"The basic aim of the digital euro is to give all citizens and firms in Europe access to central bank money, or money issued by a central bank. Digitalisation has transformed the way we pay. In the Netherlands, for example, we see a decrease in cash. Until five years ago, we used to pay with cash in shops in more than 50% of cases. This meant that there was a healthy balance between digital central bank money and commercial money, the money that consumers or businesses have in an account at a commercial bank. In recent years, however, the proportion of cash in shops in the Netherlands has dropped to 20%. To ensure that central bank money remains accessible to all and that people have a reliable, risk-free and safe form of money, we are going to investigate whether a digital euro can contribute to this. A digital euro could also provide an additional choice about how to pay and make it easier to do so, thereby contributing to accessibility and inclusion.”
“In addition, SEPA was introduced in 2014 to initiate harmonised payment solutions in the eurozone, in which the market partially succeeded. At the same time, a lot of local specifics still exist. Furthermore, people are buying more and more online, and e-commerce payment methods were developed on a national or non-European basis. As a result, they differ in their implementation and are difficult to use cross-border or scaled-up across Europe. The digital Euro can play an important role in the creation of a pan-European payment method.”
What is the ECB’s timeline in this regard?
"The ECB has completed an examination phase, in which the potential of the digital euro was tested. As the findings were positive, the Central Bank has decided to continue with an investigation phase, which started on 1 October 2021. The ECB has the lead in this phase and will, over the next two years, work together with various countries’ central banks to answer all of the still outstanding questions. These include what types of use cases are suitable for a digital euro, legal issues and other requirements that are being looked at in depth.”
“This two-year period is crucial for doing thorough research into what the digital euro should look like. After this, the final decision will be taken on whether there are sufficient grounds to introduce the digital euro. If so, the implementation will start and take about three years. All in all, this may seem long, but it is a fairly standard period for the introduction of a new product. And the digital euro is certainly not too late, as confidence in the current payment infrastructure, with its many different payment methods, is very high.”
What challenges do you envision regarding the development of the digital euro?
“The introduction of a new digital currency is, of course, not without its challenges. The ECB has to deal with a number of them:
1 Use cases
One of the main objectives is to identify the relevant use cases of a digital euro to achieve its goals. Focus will be on possible functional design based on users’ needs, and these may vary from one country to the next. Because the digital euro is being introduced in different countries, there is also a great diversity of cultures and customs when it comes to paying. For example, people in the Netherlands use ‘request to pay’ to ask others to reimburse them for a shared expense that they’ve covered. This is not common practice in some other countries. In other countries, it can be the other way round, and people can repay someone on their own initiative, if they want to. This means that different payment solutions are needed for different countries in Europe.
2 Technological levels
Countries such as Sweden, the Netherlands and Spain are already far advanced in terms of the digitalisation of payments and many payments are already made electronically. In other countries, this is less the case. This also means that there are different needs to be met in the different countries, which is why we are now looking at how to introduce the best possible digital euro for everyone.
3 Actual construction
There are different technologies available, both centralised and decentralised, which can be used when developing a digital euro. Previous experiments have shown that, in principle, anything is possible. Choices therefore can be made based on what is desirable. For this reason, research has been carried out amongst European consumers, asking them what they think the digital euro should contain. Privacy and security came clearly to the fore. A challenge in this respect is that the monitoring of transactions is necessary to, amongst other things, combat money laundering. Of course, this monitoring has to comply with all rules so that privacy is not compromised. Compliance is a prerequisite for all elements of the design, which goes without saying.”
Impact of the digital euro
“The introduction of a new type of digital currency naturally has an impact on various stakeholders, such as the financial industry, consumers and companies. However, as the investigation phase has just begun, and it is not yet exactly clear exactly how the digital euro will be structured, it is difficult to say what the precise impact will be. As the ECB said: we want it to be successful, but not too successful.”
“What is certain is that the digital euro will not replace any other current payment method; it will be an addition to these methods. In fact, the digital euro is being developed in consultation with market parties so that we can come to a solution that is best for everyone. As Fabio Panetta, executive board member of the ECB, mentioned earlier: ‘We are not crowding out market initiatives.’ In other words, with the digital euro, we expect to have a new, digital form of central bank currency, in addition to coins and bills, without detracting from the initiatives that are already in place. We think the digital euro would be a source of innovation, not the opposite. The impact may not be as big as when the euro was introduced, but these are still very exciting times. For the first time in ages, we are developing a new form of money.”