A. Brief summary:
* The ECB wants a safe, accessible and efficient digital fiat currency = the digital euro.
* The ECB wants to enhance their competitiveness against other countries (e.g. PR China) and new developments (cryptocurrencies like Bitcoin or stablecoins like Libra) in a there short time (i.e. by mid-2021).
B. Long version:
The ECB and the NCBs can issue a fiat currency in the Eurosystem, the euro. The euro is the legal tender and therefore the official mean of payment.
The euro can exist in various forms, e.g.:
– banknotes and coins in the daily circulation = physical money = cash;
– electronic form of money;
– commercial bank deposits and central bank reserves.
The modern world is changing rapidly. So called cryptocurrencies and stablecoins are becoming an alternative form of investment. Even thought they are not fiat currency (legal tender) the attractiveness of these digital tokens could have an impact on the Eurosystem and the euro area.
Imagine the situation that people sell their euros and convert it into digital tokens. Or even worse, a mighty foreign technology company like Facebook, Inc introduces an international stablecoin called Libra to their customers. The euro area has a population of 340 million, but Facebook is a platform with 2.7 billion monthly active users. Could it happen that a percentage of these users starts to exchange their digital transactions in this new digital substitute of fiat currency?
And what will happen if the world’s largest trading power, the PC China with it population of 1.4 billion will issue their own Central Bank Digital Currency (CBDC), the digitual yuan? Could PR China convince the foreign companies to use this new form of Chinese currency as an official mean of payment? Could then the ECB still control and stabilize the Eurosystem?
We do not know it and at the moment these are only theoretical threats. But this could change very quickly.
II. Current status
What we know is that several central banks around the world (e.g. People’s Bank of China, Bank of Canada) are already conducting practical steps towards the issuing of their own CBDC.
We also know that digital tokens which are not assets-backed or do not have an official issuer like Bitcoin are merely speculation investments. Digital tokens which are assets-backed and have an official issuer (stablecoins) can become an even more compelling investment form. And an international stablecoin like the proposed Libra issued by a company with 2.7 billion users could definitely become a potential new (private) currency.
Keeping this in mind the ECB started in 2020 it digital euro project. On 2 October 2020 the ECB proclaimed that the Eurosystem “must be prepared to issue a digital euro” and presented it “Report on a digital euro”.
III. Next steps
In October 2020 the ECB started it “experimentation”.
On 12 October 2020 the ECB will open a public consultation for everybody.
V. Time frame
Taking into the account, that the ECB wants to decide by mid-2021 whether and how to progress further, this is an ambitious plan. But it clearly shows that the ECB is eager to be ready to issue a digital euro.
VI. Possible impacts
The digital euro can have these 3 impacts:
(1) A new digital form of a legal render (CBDC) could be created in the Eurosystem.
(2) The EU and the Eurosystem would keep pace with the fast-changing digital world and especially with the foreign technology companies.
(3) The CBDC could also challenge the individual rights of the citizens (esp. the right to privacy).
VI. My personal opinion
Digitalization creates a lot of opportunities and challenges. The fast-changing digital world needs adequate means for it financial world. But the EU has to keep the individual rights in balance with the new developments. This is a story which I want to tell you in the near future. …