Digital Euro: ECB launches test phase

Christine Lagarde confirmed on Wednesday that the ECB would begin the first tests of what could become the digital euro for retail customers. The Frankfurt-based institution will be working with a number of private companies and commercial banks. This test phase will last two years, before a possible official launch.

The next step has been taken. After two years of study and reflection, the head of the European Central Bank, Christine Lagarde, announced on Wednesday that the digital euro was moving to the "preparation and experimentation" stage. "We must prepare our currency for the future", the French leader said in a press release.

This preparatory phase, which will begin on November 1, will last two years 👀. The aim is to find out whether this digital currency project for individuals is viable - especially technically.

If the tests prove conclusive, on both the currency and the wallet, the Council and the European Parliament will then have to definitively adopt the appropriate legislative framework.

On 28 June this year, the Commission presented legislative proposals along these lines which will serve as a basis for discussions.

Strengthening European sovereignty

To avoid any confusion, it is necessary to clarify from the outset that there are currently two digital euro projects at European level.

👉 On the one hand, the one aimed at institutional investors, whose usefulness is clearly identified with a view to the future boom in the tokenisation of digital assets. This future digital euro (everything is explained here), known as the "wholesale" euro, is for institutions and could circulate via a blockchain.

👉 On the other side, there is the "retail" digital euro, i.e. for individuals (you and me). The principle is that this digital euro should be "accessible to everyone, everywhere and free of charge".

The first thoughts about the need to launch such a project began when Facebook's "Libra" project was announced in 2019. Facebook's project, which in the meantime has become Meta, has since been abandoned, mainly because of the outcry from states and governments, which have themselves moved ahead with their own projects.

For its part, Europe (the EU to be precise) has made progress, even if the project is giving rise to some reservations, both on the part of users and commercial banks, which will be responsible for distributing it.

A project contested by banks

Commercial banks are indeed asking questions about the project because it could call their business model into question. Why is this? Because commercial banks live partly off their customers' deposits, while the digital euro would be controlled by... the ECB. In other words, deposits could escape them 😅.

To reassure the banks, the ECB has already made it known that deposits would initially be capped at a few thousand euros on an annual basis.

👉 In the spring, Fabio Panetta, who is about to become Governor of the Bank of Italy again, had mentioned the limit of 3,000 euros.

This monetary imbalance between the commercial banks and the ECB "would not necessarily pose a problem for the design of the digital euro, but more so at the time of its implementation", explains Xavier Lavayssière, an independent expert in digital finance.

"The collaboration in Brazil and India between the monetary authorities and the private sector to launch their instant payment networks, which are working very well, appeared from the outset to be more obvious than in Europe", he points out.

"The digital euro is not there to be disruptive but complementary. Its purpose is not to compete with commercial banks, but to be a universal means of payment on a European scale", explains Alexandre Stervinou, Director of Payment Studies and Monitoring at the Banque de France. In this sense in particular, digital euro bank accounts would evolve within the commercial bank ecosystem.

A complement to cash

From the user's point of view, one of the main points of concern concerns a possible elimination of long-term cash (coins and notes), currently the most secure means of ensuring the confidentiality of transactions.

ECB President Christine Lagarde is regularly questioned on this point, and in return assures us that the digital euro is intended to be an "additional" means of payment, in other words not intended to replace cash. Moreover, it will not be possible for retailers to offer any remuneration linked to the digital euro.

On 26 September last, she created controversy by declaring that the digital euro "would not be entirely anonymous" since digital money "leaves a trace on the blockchain". However, at this stage, the digital euro for individuals is unlikely to be distributed via the blockchain, with the European authorities leaning more towards an instant payment system.

In a public consultation on the digital euro, produced by the European Central Bank, respondents had placed privacy as the most important issue, far ahead of security.

One of the aims of the European authorities is to oblige Member States to guarantee better access to cash, while the number of access points has been steadily falling since 2016. In 7 years, they have fallen from around 420,000 to just under 358,000 in Europe.

The threat from private players

"If we don't innovate, users will inevitably turn to other, more convenient means of payment, which could ultimately harm the euro's attractiveness," confides a European official without explicitly naming cryptoassets. Recently, many crypto players such as Circle have positioned themselves to be able to offer a large-scale payment system in Europe.

The European authorities fear a "fragmentation of private payment solutions". As a result, they want to offer European citizens a means of public payment that is "reassuring, since they would have direct access to the central bank's currency in digital form", says Erick Lacourrège, Director General of Means of Payment at the Banque de France.

In line with this logic, the ECB wants the digital euro to be exchangeable even without an internet connection and without the involvement of a bank card, initially. Users will also have to be able to pay directly via peer-to-peer at no cost.

"The idea behind launching this digital euro for private individuals is obviously to provide a way of doing without payment players such as MasterCard or Visa", explains a person close to the matter.

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