ECB reaches a major milestone in the quest for digital euro
Imagine you are pushing your trolley down the alleys of your favorite supermarket. You are now at the counters, you whip out your EU-designed payment app and snap! The groceries are paid for at the touch of a button. No extra-EU payment network was involved in settling the transaction.
This scenario will certainly unfold in the near future as a few days ago, precisely on July 14th, the European Central Bank (ECB) has inched closer to the definition of a preliminary plan for the legal and technical design, development and deployment of a digital euro. As ECB Board Member Fabio Panetta, Chair of the High-Level Task Force on a digital euro, declared to the press, the ECB «will engage with the European Parliament and other European decision-makers and inform them regularly about our findings. Citizens, merchants and the payments industry will also be involved».
Following a public consultation carried out from 12 October 2020 until 12 January 2021, a detailed report was published which will serve as a blueprint for understanding «users’ preferences and technical advice by merchants and intermediaries». The initiative would allow the ECB to break free from foreign card companies such as Visa and Mastercard or digital payment services like PayPal.
But this digital euro, c’est quoi? Well, as the ECB states on their website, «a digital euro is simply a fast, easy and secure instrument for your daily payments». It is a creature of the burgeoning world of the so-called central bank digital currencies (also known as CBDCs, or digital fiat currencies as opposed to cryptocurrencies), digital representation of money which are at the same time a means of payment, a unit of account, and a store of value. Not to be confused with digital financial instruments, CBDCs are, for all intents and purposes, cash.
But to what extent are CBDCs different from classical cryptocurrencies, such as Bitcoin? Here it might be useful to recall the key feature of cryptocurrencies: they tend to be decentralized, both from a governance point and a technological point of view, meaning that no single entity is ever in charge of ensuring the “ledger” integrity and security. Quite the opposite, indeed: the whole network of users and developers is in charge at any given moment, thanks to a very ingenious mix of cryptography, game theory, computer networks, and open source models. On the other hand, CBDCs are almost invariably managed by a central agency or a collection thereof, such as the Eurosystem itself in the case of digital euro.
Which is why CBDCs have been met with skepticism, disdain or distrust by cryptocurrency pundits, as the centralized nature of the e-euro is purportedly doomed to represent a single point of failure, both in terms of security and data protection. As digital currencies are designed with transparency and anti-money laundering features in mind, criticism considers them to be yet another form of digital surveillance, thus reducing the freedom which is inherent in paper cash or in cryptocurrencies which tend to mimic cash because of a certain degree of fungibility, even though recent developments in so called “chain intelligence” has made this point at least controversial.
A more accurate way to describe the relationships between cryptocurrencies and CBDCs is that they sit at the opposite ends of a wide spectrum and will serve very different purposes. Whilst cryptocurrencies were born to break free from the restraints of the global financial system, CBDCs are a major innovation milestone within that very same financial system. It goes without saying that CBDCs will enjoy dividends from the large breakthroughs in cryptography spurred by the cryptocurrencies themselves. Moreover, a certain degree of interaction between the two worlds are to be expected, as it happened no later than March this year when the Bundesbank announced they had created a 10-year government bond issued using blockchain (or more precisely, DLT) with subsequent trading in primary and secondary markets settled in the same system for tests’ sake, complementing it with a “trigger solution” to connect DLT crypto assets with the payment settlement infrastructure TARGET2.
As «both the Eurosystem TARGET Instant Payment Settlement (TIPS) and alternatives such as blockchain were proven capable of processing more than 40,000 transactions per second», says the ECB, architectures combining centralised and decentralised elements «are possible».
CBDCs also have a number of advantages as far as transparency and anti-money laundering are concerned. As Luisa Scarcella, an internationally-recognized tax researcher from the Antwerp University, contends in a recent paper, «adopting an electronic version of the euro and granting it the legal tender status would certainly allow States to adopt more stringent policies for fighting AML and tax evasion». At the same time, «a cashless society imposes important questions in terms of data protection. The increasing use of digital forms of cash, the electronic recording of those transactions and the exchange of the relevant information between different stakeholders at national and international level require taking into consideration which information and how those data will be exchanged in order to protect taxpayers’ right to privacy. Depending on the level of anonymity with which a CBDCs will be designed, a digital euro can allow the monitoring of each transaction involving this type of payments».
The EU, however, is not alone in its quest. Across the globe, the People’s Bank of China is reported to have been running trial programmes for a digital renminbi (e-CNY) in several major cities, whilst policy proposals for “digital dollar wallets” were drafted in the US in the aftermath of the Covid-19 stimulus packages. Of course, as it is often the case, corporations were earlier innovators than governments: just think of how global platforms such as Facebook have long tried to overpower the stronghold of cash by building digital-currency-cum-payment-systems such as Libra.
There is quite a competition going on, a competition disguised as technological development. Indeed, digital currencies are not your typical tech doohickey: they are the linchpin of huge financial ecosystems and will be key in ensuring global preeminence if not sheer dominance, as well as independence and “technological sovereignty”.
