The digital euro is approaching. Expected no later than 2027, the ECB’s response to the rise of cryptocurrencies has several objectives, including the protection of citizens’ privacy. We take stock of the ambitions of the project.
This Tuesday, September 27, 2022, the Bank of France organized a conference dedicated to the tokenization (the issuance of a digital asset on the blockchain) of finance at the Louvre Museum. The event was mainly interested in the role of central banks in the face of the evolution of the economy, with especially the rise of cryptocurrencies such as Bitcoin or Ether.
Speakers included Christine Lagarde, President of the European Central Bank (ECB)Jerome Powell, the chairman of the Federal Reserve of the United States (FED) and François Villeroy de Galhau, the current governor of the Banque de France (BDF).
At this event, bankers spoke at length about the digital euro, the central bank digital currency project that started in 2020 in the wake of the health crisis. In the space of two years, the initiative has evolved considerably. Consequently, the Governor of the Banque de France announced the issuance of the digital euro by 2027 at the latest.
“In Europe, we are halfway through our study phase: the Eurosystem will make its decision by the end of 2023, for a potential launch in 2026 or 2027”announces François Villeroy de Galhau.
As expected, this is theEurosystem, a body composed of the ECB and the central banks of the member countries of the European Union, which will decide on the deployment of the digital euro. The decision is obviously dependent on the results of the tests currently being carried out by the ECB. It is always possible that the initiative will be postponed or even aborted.
Indeed, the digital euro is still being tested. To develop the project, the ECB has teamed up with several financial players, such as Worldline, the French payment specialist. The monetary authority has also approached Amazon to design ” potential user interfaces for the digital euro “. The choice to turn to Amazon has been strongly criticized. Many observers felt that the ECB is endangering monetary sovereignty of Europe by entrusting part of the project to an American actor. During a panel organized by the Association for the Financial Markets of Europe, Jürgen Schaaf, adviser to the ECB on the issue of digital payments, strongly defended the involvement of Amazon:
“Prototyping experiments […] are motivated by technological considerations. The companies that were chosen were the most suitable to meet our technology testing and experimentation needs”.
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The usefulness of the future digital euro
During the conference, central bank leaders discussed the uses of this future digital euro. First, the dematerialized currency must facilitate the use of the euro in an increasingly digital world. The boom in payments by card or smartphone is forcing ECB bankers to change the currency in force in Europe. The imminent advent of the metaverse, with its own internal economy, has probably accentuated the need for a dematerialized euro.
Furthermore, the digital euro is designed as a response to the proliferation of cryptocurrencies. With its own central bank digital currency, the ECB wants to prevent tokens issued by private entities, such as an exchange, or a decentralized player, from being used to pay for goods and services. Unsurprisingly, the ECB does not appreciate players like Binance or Coinbase launching solutions that are used as a means of payment, namely stablecoins like BUSD or USDC.
“We have reached the stage where between 10 and 15% of Americans and Europeans have invested in cryptos”regrets Christine Lagarde.
During their speech, the officials did not fail to tackle the cryptocurrency sector. Mirroring Christine Lagarde, François Villeroy de Galhau considered that digital currencies, such as Bitcoin, Ether or Binance Coin, are not real currencies. For the governor of the French central bank, it is more a matter of “crypto-assets”. He opposes here the notion of money to that of asset. Money differs from an asset because its value theoretically does not fluctuate over time. It can therefore serve as a store of value.
“Cryptocurrencies are not a means of payment, and are not a very stable store of value”, says Christine Lagarde, considering that cryptos are ” pure speculative assets”.
Nevertheless, the digital euro would share some of the characteristics of cryptocurrencies. At the Louvre, François Villeroy de Galhau thus assured, somewhat cryptically, that the project ” should be decentralized in its implementation”. We imagine that the governor evokes the use of the blockchain technology, which underpins crypto-assets, to roll out the dematerialized euro. The ECB would rely on a private blockchain rather than a public one. Experiments in this direction have already taken place, for example with a private blockchain based on Ethereum.
The digital euro should also facilitate international trade between banks. Transactions on the blockchain are indeed faster and more efficient than a traditional bank transfer. The Governor of the Banque de France also assures that the digital euro will ” contribute significantly to the improvement of cross-border and foreign currency payments”. Following the multiple experiments organized since 2020, in particular with the central bank of Singapore, great progress has been made on this point, underlines the manager.
This is why central banks focus on the interoperability of different digital currencies. Clearly, the digital euro must be able to work with digital currencies set up by other monetary authorities, such as the digital dollar. For the record, dozens are currently working on their own digital national currency. This is the case of Japan or Sweden.
“The digital euro can facilitate cross-border payments in an important way, which is why between the American authorities, the European authorities and others beyond, we must compare notes, explains the President of the ECB”believing that the e-euro could be more popular beyond the borders of the EU.
Privacy and Anonymity
Jerome Powell, head of the US central bank, also assured that the digital euro will give privacy first users. However, the anonymity of users will not be guaranteed. The ECB also intends to use the dematerialized euro to fight against fraud and money laundering.
For his part, Lagarde believes that a digital euro is like a banknote “with a little less anonymity”. But, unlike private companies that issue certain tokens, the ECB will take care to protect the personal data of citizens.
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The digital euro will be deployed in 2027, what will it be used for?
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