Last week, the ‘Global Blockchain Congress’: Convergence took place in Malaga, Spain where a European Central Bank (ECB) official confirmed its work on a digital Euro. The bank has explored it as both a retail and wholesale central bank digital currency (CBDC), and noted it has experimented with blockchain.
“We have a dedicated team looking at this in the ECB. Even if we’re not particularly vocal on this compared to other central banks, we’ve been doing a lot in the past,” said the bank’s Innovation team leader, Dirk Bullman, who spoke at the event last Tuesday. This was a few days after, according to Reuters, an ECB official claimed digital Euro work was underway and “several options” were being considered.
A digital Euro?
Two weeks ago, the Association of German Banks released a detailed plan for a ‘crypto-based digital Euro’, saying it should be launched by regulators. The group are likely to be pleased with Dirk Bullman’s comments on the panel entitled ‘Is the world ready for global digital currency?’.
When asked about a digital Euro, he said: “The ECB is exploring the matter. I think that should be made clear. We are doing theoretical research, but we are also doing practical experimentation. And we look at, what we call, a wholesale [institutional] CBDC and we also look at retail, general-purpose CBDC.”
The former begs the question: “Can we move our own payment systems to DLT? So, this is actually what it comes down to when you speak about wholesale CBDC, and we are exploring this, we’ve been exploring this since 2016 with the colleagues from the Bank of Japan on Project Stella,” explained Bullman.
Stella completed its third phase this June, which looked at DLT for cross-border payments. The ECB report focuses on wholesale CBDCs, whereas the Bank of Japan (BoJ) published a report on retail CBDCs earlier in the year. At the panel, BoJ official Yuko Kawai confirmed that the central bank was one of the 70% who had reported working on digital currency to the BIS.
Though Bullman admitted blockchain might not be mature enough for a digital Euro: “I think, even if we say it from today’s perspective, … the technology is not yet ready for prime time because we offer the backbone of the financial sector.”
“But, but we also see many developments, that is, it evolves very fast. So I think there’s a lot of positive aspects to blockchain. And maybe it’s only a matter of time,” he added.
“So, then we have the retail CBDC, and that is the most complicated discussion,” Bullman continued. Indeed, the difficulty of a consumer-focused CBDC has many factors; as the Bank of Japan’s Kawai pointed out, who will protect citizens? If something happens, at whose cost will it be fixed?
To Bullman: “it boils down to three key questions… what is the motivation? Second question is, what should the design precisely look like? And the third question is, how to implement it?”
Essentially the digital Euro ‘why, what, and how’, the ECB hasn’t seen a solid reason for a consumer version. Payment systems are already very efficient, and despite the Nordics’ use of digital money, cash is still used for 79% of point of sale transactions in Europe. “So it’s difficult to find a good motivation from our perspective [today],” he summarized.
As to the what – there is plenty to consider: “Should it be anonymous? […] Should it be interest bearing? Should there be limits? And we are exploring this theoretically, and we do also do experiments.”
Bullman revealed: “We have now finished an experiment where we explored to what extent the anti-money laundering directive requirements could be met by CBDC which is put on a blockchain.”
Finally, issuance is something central banks continue to grapple with. Kawai stated in her opening speech that if a central bank directly offers the CBDC, then private banks may start to decline. An alternative is China’s two-tier method.
“This is the question whether DLT is the answer, and this is what we have been exploring,” said Bullman. “And as I said, from today’s perspective, it’s difficult, but there’s a plethora of questions we have to analyze before really coming to conclusions. And we are looking at all these things in detail.”
When can we expect a digital Euro?
The ECB, as Bullman mentioned, has been quieter than other central banks about its CBDC progress. But this could change, as the world of international finance will see several personnel changes before the year is out. Former IMF chief Christine Lagarde will lead the ECB for an eight year term, having started just two weeks ago.
She has previously made encouraging comments regarding a consumer CBDC; “My message is that while the case for digital currency is not universal, we should investigate it further, seriously, carefully, and creatively,” Lagarde said last year.
In a September speech, she commented on the role of central banks: “In the case of new technologies – including digital currencies – that means being alert to risks … But it also means recognising the wider social benefits from innovation and allowing them space to develop.”
Another personnel move is that of G7 stablecoins chair Benoît Coeuré, who recently left the ECB to lead the BIS Innovation Hub in Switzerland. The Swiss branch will focus on CBDCs, and with Coeure will likely speed up its operations. These new leaderships perhaps signal BIS and ECB digital currency progress sooner rather than later.