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Bank for International Settlements: Digital Euro Project Enters ‘Preparation Phase’

The digital euro is feasible, and now comes the next chapter.

In a speech delivered Tuesday (Nov. 21) and published by the Bank for International Settlements, Pablo Hernández de Cos, governor of the Bank of Spain, said Europe’s digital euro efforts reached a new milestone.

Having determined that the digital currency is feasible, the Governing Council of the European Central Bank is turning its attention to what Hernández de Cos termed the “preparation” stage.

At a high level, he said, the digital euro would be free of charge for basic banking services, and payments and would be usable with a mobile device or card.

The motivations for the digital euro, he said, revolve around “complementing cash in an environment of increasing digitalization; promoting innovation and efficiency in the European payments system; and safeguarding our strategic autonomy and monetary sovereignty.”

The increasing shift to digital payments, along with a decline in the use of cash, might “ultimately affect” central bank money as “an anchor for the stability of the monetary system as a whole,” he said. Although cash still is the prevalent method of payment at physical locations, 55% of citizens said they prefer to use cards and other electronic means of payment for face-to-face transactions. However, 60% of consumers want to have the option of paying in cash, so the digital euro should “not under any circumstances” replace cash.

There’s still fragmentation in the European payments system, said Hernández de Cos, especially across digital channels, where SEPA and separate mobile payments options are not interoperable. But a digital euro, he said, could “ensure a uniform user experience throughout the euro area for person-to-person and point-of-sale payments.”

He cautioned that the potential for users to shift deposits to the digital euro favors “setting maximum limits,” as yet undetermined, for the digital currency. And, he added, a “compensation model” would provide payment service providers with incentives to guarantee the ecosystem remains intact. In that model, payment service providers would conceivably charge merchants and simultaneously pay a commission to the bank of the digital euro account holder.

Delving Into the Preparation Phase

As for the preparatory stage, Hernández de Cos said that the phase would last two years and offer a “digital euro rulebook.” A preliminary draft may come as soon as the end of this year, with a subsequent commentary period. The second part of the preparation phase would entail choosing providers to develop the digital euro platform.

“[T]he decision to proceed to the preparation phase does not mean we have decided to issue the digital euro,” cautioned Hernández de Cos.

Although preparation does not guarantee issuance, the momentum is building for central bank digital currencies elsewhere around the globe, but cautions abound in the United States.

In one example, the Monetary Authority of Singapore unveiled a series of initiatives Thursday (Nov. 16) aimed at ensuring the secure and innovative use of digital money in the country.

In the U.S., the Federal Reserve’s New York Innovation Center and several banks said over the summer that a proof-of-concept project tested a wholesale CBDC.

But some central bankers have been sounding notes of caution. Federal Reserve Governor Michelle Bowman said last month that she remained concerned about the potential risks associated with a U.S. CBDC. She argued in a speech that she has yet to see a compelling argument that a CBDC could address frictions within the payment system better than alternatives, such as the FedNow® Service instant payment system.