Digital euro could be in circulation by 2027, ECB tells bank forum

For those of you chomping at the bit to use a digital euro to buy a cup of coffee or pay your taxes, you could be waiting a while, as the earliest possible issuance for a digital euro is 2027, Jürgen Schaaf, advisor to the European Central Bank (ECB), told the BAFT Europe Bank to Bank Forum in London recently.

Laying out a potential timeline for issuance of the retail central bank digital currency (CBDC), Mr Schaaf, who advises the senior management of the ECB’s Market Infrastructure and Payments division, said the digital euro is currently in the investigation phase and that by the spring, the ECB should have an overview of design choices.

“By the autumn, the ECB’s Governing Council will decide if we are going to proceed with the realisation phase,” he said. “Extensive testing of prototypes will take another three years to really get to grips, so the earliest issuance would be 2027. This will still require a final decision to be taken prior to the issuance.” 

CBDCs are described as “a slow-moving train” for a reason. While 114 countries are exploring them, according to the Atlantic Council’s CBDC Tracker, only 11 have fully launched a digital currency, and 18 of the G20 countries are now in the advanced stages of CBDC development.

The concept of CBDCs has been around since the early 2000s, but it took the prospect of a global stablecoin, Libra (later renamed Diem), being issued by one of the world’s biggest social media networks, Meta (formerly Facebook), to shock a large number of central banks into action. Even then, progress has been painstakingly slow.

However, Lee Braine, managing director in the chief technology office at Barclays, told the BAFT Forum that things are moving at pace, and referred to a “CBDC Hackathon” Barclays held last year with industry participants, including Lloyds Bank, Mastercard and IBM, showcasing what could be done in the space. 

Could retail CBDCs disintermediate banks?

Mr Braine concedes CBDCs could be highly disruptive and have commercial implications. One such impact is the potential for retail CBDCs to divert customer deposits from commercial banks to central banks.

“The main financing source for banks in Europe is customer deposits,” Mr Schaaf explained. “If we design a digital euro that is too attractive, the risk is that it will move money from the balance sheets of commercial banks to the ECB. We are convinced that we can address that with a threshold on private holdings of the digital euro or by disincentivising remuneration for a CBDC, or a combination of both, so the private sector is more attractive.”

Mr Braine said Barclays is also looking at this risk and potential mitigations. A March 2022 paper, co-authored by Mr Braine and Shreepad Shukla, also from Barclays’ chief technology office, proposed introducing “a common programmability layer across CBDC and commercial bank money”, using interfaces with both the central bank’s ledger and commercial banks’ ledgers so that CBDCs and commercial bank money were interoperable and had similar operational capabilities. 

When it comes to direct contact with the retail customer, Mr Schaaf insists the ECB knows its limitations and would leave that to the private sector, namely payment service providers, banks or other companies. “There is space for the private sector, based on settlement and the assets provided by us,” said Mr Schaaf.

However, any entities that interact directly with customers and handle the distribution of a digital euro would need to be governed by a European framework and supervised, he added, to ensure it did not become a “Wild West”. The cost for merchants will also need to be lower than existing fees, to facilitate adoption.

The first use cases the ECB is prioritising for the digital euro are person-to-person payments, point-of-sale payments, e-commerce and payments between governments and citizens (such as taxes or transfers). Mr Schaff says a digital euro would address not only declining cash usage in the eurozone, but also strengthen European sovereignty over the financial system, which is currently dominated by non-European companies. It would also prevent payments, which is a network business, from being monopolised and open to abuse, which could see fees, or “data hunger”, increase excessively. 

Could a synthetic CBDC run faster?

But using a digital euro to buy a cup of coffee or pay your taxes is unlikely to have the same transformative impact as a wholesale CBDC. “One of the biggest use cases for CBDCs is making cross-border transactions faster and cheaper,” Xiaonan Zou, head of digital assets within treasury at UBS, told the forum.

If that becomes reality, she says fewer intermediaries will be needed. However, correspondent banks would still play a role in primary issuance of a wholesale CBDC, she added, including initiating transfers and exchange of CBDCs, and performing anti-money laundering and know your customer checks. 

The “Rolls Royce of CBDCs”, said Ms Zou, would advance e-commerce and international trade and bring it to a different level — making it round the clock to match the 24/7 operation of the blockchain. It could also unlock liquidity from banks.

She also spoke about the prospect of ‘synthetic’ digital currencies that are not 100% a CBDC, but share a lot of similar characteristics. Such currencies would be operated and managed by the private sector, commercial banks or a consortium of commercial banks, but would be backed by central bank reserves.

Fnality, the distributed ledger payments market infrastructure comprising 17 financial institutions, last year tested such a synthetic CBDC, Ms Zou explained. “There is a lot less risk compared with a commercial bank stablecoin,” she said, adding that a private sector or synthetic CBDC could run faster than a wholesale CBDC.

• Read more about wholesale CBDCS.