In a significant move this week, members of the European Central Bank and the European Commission have published a legislative proposal for the creation of a digital euro, which would function as a central bank digital currency (CBDC). The proposal aims to address the diminishing use of physical cash in an increasingly digitalised world and the necessity for the euro to keep pace with technological advancements.
Advocates of the digital euro emphasise the importance of preserving privacy while facilitating seamless transactions. According to the proposal, the CBDC would coexist with cash, ensuring that cash remains universally accepted within the euro area. The digital euro would enable users to conduct online and offline payments through a digital wallet, and unlike many other digital payment methods, it would be free of transaction costs. Notably, the offline wallet function would provide an increased level of data privacy, a crucial factor for critics of CBDCs who express concerns about potential privacy infringements associated with a centralised government currency.
The introduction of a digital euro would have extensive implications for the digital payments sector. The European Commission has highlighted that a small number of global corporations currently process around two-thirds of Europe’s digital retail payments. These transactions often entail substantial transaction fees, especially for small businesses, which may be passed on to consumers. The European Commission estimates that digital payments for small-scale operators could incur fees ranging from 1.5% to 5% per transaction, along with additional expenses of five to 15 euros per transaction. The absence of transaction costs associated with a digital euro could alleviate this burden for users.
This proposal is reflective of a global trend towards CBDCs. A comprehensive study conducted by the Atlantic Council think tank as reported by Reuters reveals that 130 countries, constituting 98% of the global economy, are actively exploring digital versions of their respective currencies.
According to the study, nearly half of these countries have reached advanced stages of development, pilot testing, or even official launches. For instance, eleven countries, including several Caribbean nations and Nigeria, have already introduced their CBDCs, while China’s extensive pilot testing involves 260 million people and encompasses 200 different scenarios ranging from e-commerce to government stimulus payments. India and Brazil, two prominent emerging economies, have also announced plans to launch their digital currencies next year. The European Central Bank itself is on track to commence a digital euro pilot, potentially leading to its official launch in 2028. Moreover, over 20 other countries are expected to take significant steps towards conducting pilots this year.
Although progress on a digital dollar in the United States has been primarily focused on a wholesale version for interbank transactions, efforts to develop a retail version accessible to the general public have stalled. Given the dollar’s dominant role in the global financial system, any decision regarding a digital dollar carries substantial global implications. The Federal Reserve has indicated that the decision to launch a digital version should rest with Congress, rather than the central bank itself.
The increasing global momentum behind CBDCs is driven by the declining use of physical cash and the desire of authorities to safeguard their monetary sovereignty in the face of challenges posed by cryptocurrencies and prominent technology companies. Recent years have seen the imposition of sanctions on countries like Russia and Venezuela, prompting even longstanding U.S. allies such as Europe to seek alternative payment networks to mitigate their reliance on Visa, Mastercard, and Swift.
The Atlantic Council notes a doubling of wholesale CBDC developments since the G7 sanctions response to Russia’s invasion of Ukraine. Furthermore, there are currently twelve multi-country “cross-border” projects in progress. Sweden remains at the forefront of CBDC pilot programs in Europe, while the Bank of England continues its work on a potential digital pound set to be operational by the second half of this decade. Australia, Thailand, South Korea, and Russia also intend to conduct pilot tests throughout this year to further explore the potential of CBDCs.
On a broader scale, the International Monetary Fund (IMF) announced last week that it is developing a global platform for central bank digital currencies (CBDCs) in an effort to facilitate cross-border transactions.
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