The ECB’s proposed CBDC is a welcome development but must take existing payment solutions, privacy concerns and stablecoins into account, write Jonas Gross, chairman of the Digital Euro Association and Philipp Sandner, founder of the Frankfurt School Blockchain Center.
The European Central Bank (ECB) has been exploring the idea of issuing a digital euro, with the aim of modernising the eurozone’s financial system and keeping pace with the rapidly evolving digital economy.
While Europe must not delay in implementing its own central bank digital currency (CBDC) – as other major global currencies update their payment infrastructures – it needs to be designed adequately. Yet a digital euro is only one part of the picture, with euro-denominated stablecoins an equally important topic, given that US dollar stablecoins already exist, boasting a daily trading volume in the tens of billions of dollars.
The digital euro is a digital form of the euro issued and backed by the ECB. Under the bank’s current conception (with a final decision on launch yet to be made) it would primarily target citizens, and thus be classified as a retail CBDC. Administrative tasks around the digital euro, such as creating wallets and accounts, funding accounts and handling know-your-customer processes, would be the responsibility of banks.
It is worth noting at this point that the term ‘digital euro’ can be applied to euro stablecoins as well as a CBDC. The EU’s Markets in Crypto Assets regulation will regulate euro stablecoins, which can be divided into e-money tokens and asset-referenced tokens, with both subject to strict rules. Euro stablecoins would offer advantages including cross-border use and opportunities for novel use cases enabled by blockchain technology.
Benefits versus risk
The digital euro project raises several questions: is the ECB’s approach appropriate? Is a digital euro even necessary? What are the potential benefits and risks for European citizens? How are euro stablecoins connected to this issue, and could they offer advantages, particularly considering they might be launched years before the ECB’s solution?
it is difficult to see what the digital euro could do better than private sector solutions
The ECB envisages a digital euro that is visible in today’s online banking apps, allowing users to transfer money from their traditional bank accounts into a wallet at the ECB and use it for payments. The ECB’s goal is to create a ‘debit card 2.0’ by 2026 at the earliest.
But is this new payment infrastructure necessary? With well-functioning online payment methods already available through PayPal, Visa, Mastercard, Apple, and Google, it is difficult to see what the digital euro could do better than these private sector solutions.
Generally, a CBDC could offer benefits including lower transaction costs (for example, for cross-border payments), improved financial inclusion and enhanced security if designed adequately. It could also enable programmable payments, which would facilitate the use of smart contracts and improve transaction efficiency.
The ECB’s digital euro would also offer geopolitical benefits, providing Europe with a sovereign payment infrastructure under the euro system’s control. This would reduce dependence on foreign entities which might restrict access in situations like sanctions, increasing Europe’s autonomy.
While these sovereignty arguments are valid, they may not be relevant to everyday users. It therefore may be challenging for the ECB to persuade European citizens to adopt the digital euro with its current design focus.
Further, the introduction of a digital euro also comes with risks and challenges, such as privacy concerns, cyber security risks and potential negative impacts on commercial banks.
Protecting privacy
How should the digital euro by the ECB be designed? The CBDC Manifesto is a guiding document that outlines the principles, objectives and potential design features of a CBDC. It is a set of recommendations on how to design a retail CBDC, co-authored by the Digital Euro Association and the CBDC Think Tank.
Read more about the digital euro
One of the key principles of the CBDC Manifesto is the protection of privacy for citizens. Ensuring that the digital euro protects privacy for users is essential to guarantee civil rights and foster trust in the system. While digital transactions inherently carry privacy risks, it is crucial to strike a balance between privacy and security. Physical cash will still be an option for privacy-conscious citizens, but the digital euro should offer a comparable level of privacy protection.
The CBDC Manifesto also emphasises that a CBDC should not harm society and should be based on principles of self-determination and freedom. While the ECB plans to follow this principle initially, concerns arise regarding future adherence, especially as programmable money applications are being tested in other countries, such as China. Implementing technical solutions like “privacy by design” can help ensure central banks continue to uphold these principles.
Banks depend on deposits to provide loans and the introduction of the ECB’s digital euro could disrupt this process if a significant amount of deposits are withdrawn. The ECB plans to implement thresholds on maximum account balances for its digital euro, but the final decision on the threshold level and its potential impact on the financial sector have not been thoroughly analysed. Striking a balance between preventing excessive outflows from the financial sector and achieving a high market share is essential for the digital euro’s success.
