Is the Digital Euro Coming Soon?

The European Commission is the executive branch within the broader European Union or EU. It apparently intends to introduce the continent's own digital euro bill sometime during 2023. This would coincide with experimentation done by the European Central Bank with a retail version of central bank digital currency across the union.

The ECB has a history of giving off many mixed signals about a digital euro becoming reality or not. Officials have given conflicting statements where one time they would say a digital currency couldn't be guaranteed but another would indicate a digital euro is probable to be a legal tender. The current bill news provides some clarity.

CBDCs have been a focal point of interest around the world, given the rise in popularity of stable coins pegged to specific assets or private cryptocurrencies, such as Bitcoin. Nigeria has already launched its own CBDC, whereas others, such as China and Canada, are operating pilot programs.

EU citizens have been asked what they want in a digital euro. The answers were security, privacy, and the ability to use it as a means of payment across all 27 member nations of the EU. One big unknown is whether or not the digital euro would be based on the blockchain technology originally responsible for cryptocurrencies.

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The ECB definitely wants a digital payment system, but it's up in the air as to whether or not it will be based on blockchain or something more conventional. Using blockchain would go a long way to address demands by the public for security and privacy.

A European digital currency could have implications on financial stability across the continent. Could it provide a fail-safe that protects banks when lots of customers pull their deposits out? This often happens when banks have imposed negative interest rates on them.

The ECB is worried about such things happening. One idea is remunerating holdings of digital euros at variable interest rates or even limiting how many digital euros people could use or hold in certain transactions.

A euro CBDC might also face low rates of use. Without an inherent competitive advantage, a digital euro might lose ground to certain private payment systems. However, the high-grade data protection that would come with it could prove appealing to those who value their privacy.

One thing the ECB is quite clear about is maintaining its assumed sovereignty over both payments and finance. Having said that, there is an international competition in retail payment systems. Service providers from outside Europe are quite successful, even on the continent. PayPal, MasterCard, and Visa are specific examples. EU politicians don't always like that.

They don't mind competition, but they also want to see at least a single retail payment system that consistently works across Europe. They want it to work in every European country but is also under European control. Part of this has to do with a broader global response to the digital currency system China is now using.