The European Central Bank (ECB) has announced a project to create a “digital euro”, which will begin with a research phase that will last 24 months. This stage of analysis will serve to decide on a design that is likely to limit the maximum quantities in circulation, although the decision on issuance will be made at a later stage.
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The ECB has informed that the implementation period of the digital euro would be three years after a meeting in which the president of the Eurogroup, Paschal Donohoe, also participated, who has expressed his support for the project. “Nine months have passed since we published our report on a digital euro. In this time, we have carried out further analysis, sought input from citizens and professionals and carried out experiments with encouraging results.” said the President of the ECB, Christine Lagarde.
“All this has led us to decide to go up the pace and start the digital euro project,” added Lagarde. With this project, the ECB wants to ensure that “in the digital age, citizens and companies continue to have access to the safest form of money, central bank money,” the president of the ECB added.
A member of the ECB’s executive committee, Fabio Panetta, has revealed that the ECB has engaged with the European Parliament to report regularly on research findings on the digital euro after being in contact with citizens, merchants and the payments industry. . Panetta, who chairs the project for the new virtual currency, wrote in a letter to the president of the European Parliament’s Committee for Economic and Monetary Affairs, Irene Tinagli, that later this year they will discuss the political objectives and uses of the digital euro.
In the first or second quarter of 2022 they could discuss aspects related to the design of the euro and later its impact on the financial system and on the use of cash, according to Panetta. In a virtual conference with journalists, Panetta reiterated that the limit of digital euros that a citizen could have could be 3,000 euros, which is the average amount of cash in circulation per capita.
Limits on the amount of euros in circulation could help combat payments for illicit activities and reduce their use as an investment. Limits on the amount of digital euros that non-euro area residents can use would also prevent a major impact on the euro exchange rate.
The ECB can also use remuneration, interest rates, to encourage or discourage the holdings of digital euros. For example, non-residents may find it very attractive to have digital euros at any given time, which would create capital inflows and put excessive pressure on the euro exchange rate.
For this reason, it is important that the design of the digital euro guarantees that it will be a form of payment and not a form of investment, the ECB has stated. A remuneration system could be established that is not attractive for excess holdings of digital euros.
Payment method, not investment asset
During the investigation phase, the ECB will also analyze aspects related to the necessary changes in European Union legislation to be able to issue a digital euro. The ECB is also going to analyze the possible impact of a digital euro on the market at this stage.
The design of the digital euro must ensure privacy and avoid risks for European citizens, intermediaries and the economy in general. The ECB has carried out, together with the national central banks of the euro area, proofs of concept to assess the technological feasibility of a digital euro.
The tests revealed that existing infrastructure, such as TARGET’s Instant Payment Settlement Service (TIPS), as well as distributed ledger technology, could be leveraged to process the roughly 300 billion retail payments made each year in the area of the euro.
These services process more than 40,000 transactions per second, according to the ECB. The experimental work “made it possible to identify possible options to protect privacy, ranging from data segregation to the use of cryptographic techniques,” as Panetta explained.
The experiments, adds the senior BC official, also showed that the energy consumed by the settlement infrastructure they use “is negligible compared to the energy consumption and environmental footprint of crypto assets such as bitcoin, which uses more electricity than Greece or Portugal”.