A digital euro? The ECB’s take on a fully digital currency

On 2 October 2020, the European Central Bank published a report presenting its considerations on the possibility of a digital euro, explaining its objectives, the requirements it would need to meet, its potential benefits and risks.

Cryptocurrencies, stablecoins and CBDCs.

The idea of a digital currency has become increasingly popular in the last decade. First, cryptocurrencies, like Bitcoin or Ethereum, and the blockchain technology made their appearance, with the most enthusiastic of their supporters predicting the end of centralized monetary systems. Nevertheless, both experts and central bankers refused to consider them a threat to the status quo or to central banks’ authority as monetary policymakers, and rightly so. The high volatility of such instruments reduces their feasibility as a store of value and unit of account, making them nothing more than a speculative asset.

BTC/EUR fluctuations since the birth of Bitcoin

Then, in June 2019, Facebook announced its intention to establish its own digital currency, called Facebook Libra. In order to avoid the volatility problem, Facebook intended Libra as a stablecoin, which is a digital currency whose value is linked to another currency or, as in Libra’s case, to a basket of currencies. However, critics point out that Facebook, as any other private company, can fail, while central banks (usually) do not; they argue that this undermines the long-term credibility of the currency. Then, some cast doubts on the reliability of (foreign-based) private companies with respect to security and accountability. Finally, regulatory authorities are not so keen on the idea of a parallel private currency, especially because of the threat it poses for the effectiveness of monetary policy and the stability of financial markets; hence, it is unlikely that Libra would be granted the status of legal tender anytime soon.

However, Facebook’s announcement, along with the increasing popularity of e-commerce and electronic payments, clearly indicates the direction in which society is moving with respect to money and payment methods. For these reasons, many central banks are now carrying out extensive research on Central Bank Digital Currencies (CBDCs), pondering different technical and organizational designs. CBDCs could represent a digital alternative to cash and bank deposits controlled by a public authority; this would ensure stability in the value of the digital currency and in the overall financial and monetary system. In theory, it would also guarantee a higher degree of payments efficiency and cyber resilience. Currently, the People’s Bank of China leads the race, being the first to start testing its digital yuan by distributing an equally small sum to 50,000 randomly selected citizens. Establishing a technologically advanced digital yuan might serve China’s long-lasting goal of internationalizing its currency. Others, like the U.S. Federal Reserve, the Bank of England and the Bank of Canada are looking for ways to stay on top of research and innovation. In this geopolitical, economic and technological competition, the ECB places itself as one of the frontrunners.

Digital euro report: objectives and requirements

In the aforementioned report, the ECB presents the digital euro as a liability in the Eurosystem’s balance sheet, complement to cash and central bank deposits, to be used and widely accepted by European citizens and companies as a form of retail payment. The digital euro would be convertible at par with the traditional euro, and as such it would be a risk-free asset. The report finds a quite solid legal base for a digital euro in the TFEU; however, it recognizes that further legislation would be needed to strengthen the status of legal tender of the digital currency, especially in the case of direct distribution to the public.

The purpose of the report is not to signal an intention of the ECB to issue a digital currency in the near future. Rather, it is a way to inform the public on the institution’s findings and considerations on the matter, in the spirit of transparency that has always characterized it. Most importantly, the report presents the ECB’s priorities and objectives, as well as the actions it will need to take to face future developments in the Eurozone. For starters, should alternative (digital) forms of payments become widely used in the Eurozone, the Eurosystem must be ready to provide a safe, stable, cyber-resilient, competitive, and user-friendly alternative. The ECB fears that the recent movement from cash to private digital forms of payment risks increasing the financial isolation of those "unbanked" people with less access to digital means; this is why a digital euro should maintain cash-like features and be widely accessible. Such commitment also requires the ECB not to shy away from using the best te