The European Central Bank’s digital euro: an assessment
Euro sculpture in front of the headquarters of the European Central Bank (ECB) in Frankfurt am Main
The European Central Bank (ECB) communicated its initial assessment of the digital euro a few weeks ago. In the report published on this occasion, the ECB gives a first insight into its ideas on the digital euro. In this guest article, Jonas Groß, Philipp Sandner and Alexander Bechtel assess the ECB’s report and discuss its three most important aspects.
In October, the European Central Bank (ECB) published its long-awaited „Report“ on the digital euro, a digital central bank currency (CBDC) for the euro area. The ECB addresses the issue of the digital euro from the perspective of its mandate. The ECB’s primary intention is to create a digital form of Bitcoin Bank cash for European citizens rather than a programmed form of the euro for European industry. However, in view of the ECB’s analysis, it is clear that the digital euro outlined by the ECB is not a digital version of cash. For example, the ECB is currently keeping it open whether the digital euro will be token-based, non-interest-bearing and anonymous – all core characteristics of cash.
Key contents of the report
In its report, the ECB stresses that it has not yet decided whether a digital euro will actually be introduced. At the same time, however, the central bank stressed that it was ready to introduce a digital euro „if the need arose“. The ECB defines the following scenarios which could lead to the need for a digital euro:
First, to support the digitisation of the European economy.
Secondly, a digital euro could be a response to a significant decrease in the use of cash as a means of payment.
Thirdly, a digital euro could be needed to reduce dependence on foreign CBDCs or private digital coins, such as Libra, China’s DC/EP, or a US CBDC.
In addition to these scenarios, the ECB also discusses risks that could arise from a digital euro, such as those related to financial stability, regulation, IT security, capital flows and the euro exchange rate. The ECB stresses that such risks need to be adequately addressed and therefore sets out requirements that a digital euro must meet to counter such risks.
Three key aspects of the digital euro
The following three key aspects are helpful in interpreting the report correctly. For example, the report and the outlined proposals for the digital euro show that the digital euro is not digital cash. Furthermore, the ECB unfortunately neglects the aspect of programmability, although this very aspect is extremely important for industrial applications. Finally, it can already be seen that existing financial intermediaries will play an important role even with a digital euro from the ECB.
1 The digital euro is not digital cash
In the report, the ECB stresses that the digital euro should be a kind of „digital cash“. It would therefore be expected that the digital euro would have to imitate the characteristics of physical cash as closely as possible. However, this is not the case. The principles of the digital euro discussed in the ECB report differ significantly from the basic characteristics of physical cash: first, cash is a bearer instrument and a token-based form of money. Second, cash does not yield interest. Thirdly, cash allows transactions to be carried out anonymously, at least up to a certain threshold (e.g. 10,000 euros in Germany). The ECB has so far not committed itself to any of these three characteristics. Instead, the ECB is currently keeping open the possibility of making a digital euro account-based, interest-bearing and non-anonymous.