ECB prepares to pick providers as digital euro enters next phase

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The European Central Bank (ECB) has announced it is entering the ‘preparation phase’ of its digital euro project following the conclusion of a two-year investigation into the potential design and distribution of a European central bank digital currency (CBDC).

The investigation phase was launched in October 2021 and culminated in a 44-page
report detailing the ECB’s findings, which was released alongside the announcement of the preparation phase.

That report sets out the aims of a digital euro and the benefits it would bring to the Union. Among the factors listed are that it would be easy to use, free for basic use, useable for any digital payment in the euro area, is inclusive, is secure, settles payments instantly, and is risk-free thanks to its central bank backing.

“No other digital means of payment offers all these characteristics at once. The digital euro would fill that gap,” the report reads.

It also contains details of what the ultimate digital euro would look like. The report says that the digital euro could be accessed either via their payment provider’s proprietary app and online interface or via a dedicated digital euro app provided by the Eurosystem. Those without access to a bank account or smartphone could use the digital euro, such as by using a card provided by a public body, which can be exchanged for cash (or vice versa).

The digital euro would also be free for basic individual use. A ‘compensation model’ is also intended to be used to ensure that intermediaries are adequately incentivized to distribute the digital euro.

The preparation phase formally kicks off on November 1 and is projected to last for two years. It will focus on finalizing the ‘digital euro rulebook’ and selecting providers to develop the required platform and infrastructure.

The announcement is also careful to point out that a decision on whether or not to issue a digital euro has not been made and is still a long way off following the ECB’s multi-phase process. A final proposal will be submitted to the EU Governing Council.

“We need to prepare our currency for the future,” said ECB President Christine Lagarde.

“We envisage a digital euro as a digital form of cash that can be used for all digital payments, free of charge, and that meets the highest privacy standards. It would coexist alongside physical cash, which will always be available, leaving no one behind.”

Will the digital euro be the one to break the CBDC barrier?

Although the conclusion of the preparation phase is not expected until 2025—and with no decision expected for some time after that—the EU’s progress toward a CBDC can hardly be called blistering. Nonetheless, there appears to be a real motivation within the ECB to see the digital euro brought to fruition. Given the mixed bag of attempts from elsewhere in the world, a careful and considered approach is likely what is needed if a CBDC is ever to succeed.

Certainly, the EU’s approach has brought a CBDC closer to fruition than the U.S.’ own attempts, which have thus far been bogged down in partisan debate and suspicion. This is succinctly illustrated by a recently introduced bill that would expressly forbid the Federal Reserve from issuing any CBDC without the express consent of Congress—unsubtly dubbed the ‘CBDC Anti Surveillance State Act.’

A Federal Reserve Governor gave a speech last week in which she largely set out the supposed aims of a CBDC and largely echoed the language used by the ECB—frictionless payments, security, financial inclusion—but ultimately expressed doubts about the ability of a CBDC to meet them.

Attempts elsewhere around the world lend credence to that view. For example, a pilot CBDC project in several Caribbean countries was launched in 2021, but faced technical outages in the early stages of its life, and citizens have been slow to use the CBDC.

Technical outages in the Caribbean also raise the question of whether the technology exists to roll out a CBDC at scale. This will be crucial to the digital euro’s preparation phase as technology providers are vetted and selected. Scaling is a problem many blockchain protocols have grappled with, and few have proven to be able to support low-cost, instant payments within their own narrow ecosystems; fewer still can do this at scale without compromising on security.

BSV blockchain is one such protocol that has demonstrated this ability and has already exceeded the throughput offered by legacy payment systems such as PayPal (NASDAQ: PYPL) and Mastercard (NASDAQ: MA). At the GITEX Global 2023 conference in Dubai, BSV blockchain was on hand to demonstrate a daily transactions per second rate of 100,000—with ambitions to reach 1 million transactions per second within months.

Brendan Lee, co-founder of Elas Digital—a company already making use of BSV’ blockchain’s scaling capabilities—was in attendance:

“I think it’s an exceptionally important piece of infrastructure not just for BSV blockchain but for the world at large, because the world at large needs blockchain to actually reorganize the flow of information. Blockchain gives us a way where we can capture our records, provide those records to people in a way that’s meaningful to them, where they get context, where they get proof of provenance of that data. For all of those things, one elegant, efficient, low-cost solution really brings the world forward a long way.”

That certainly sounds like the kind of scale you’d need to roll out a digital asset to an entire continent.

Still early days for the digital euro

None of this is to say that the digital euro enjoys unanimous support within the EU. European lawmakers have expressed similar suspicions over the potential for CBDCs to be used to surveil and control citizens—an attitude that European officials seem keenly aware of. ECB executive member Fabio Pancetta, a vocal proponent of the digital euro, has often spoken in terms that seem expressly geared to address those concerns. More recent iterations of the digital euro proposals have also focused on privacy and data control.

To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.

Watch: Finding ways to use CBDC outside of digital currencies