Digital euro – what is new and coming up?
The interest in and awareness of the Latvian population of the digital euro is growing. According to a survey conducted by Latvijas Fakti in February 2023, nearly half (49%) of the population has already heard about the potential introduction of the digital euro in the future. This is a 14 percentage point increase from August 2022.
According to sociological data, young people are more knowledgeable about the digital euro (58% of those aged 15 to 24, compared to 38% of those aged 65 to 74). People who live in Riga (61%), have a university education (60%) and have higher income (64%) are more familiar with the digital euro. This demonstrates that the digital euro is of great interest to the most economically active and technologically savvy individuals.
What stage is the digital euro currently at? The Eurosystem (the European Central Bank (ECB) and the national central banks of the euro area, including Latvijas Banka), launched the digital euro investigation phase in October 2021. During this stage, the ECB, in cooperation with euro area central banks, market participants and in consultation with the general public, decides on the functionality or design of the digital euro. The investigation phase will end in October 2023, when the decision-making bodies of the European Union will decide whether (or not) to launch the experimental phase of the digital euro.
Given the size of the digital euro project, careful studying and testing are required before the final decision is made to issue the digital euro throughout the euro area.
What could the digital euro look like? The Eurosystem is considering various options, but from the perspective of the end user, the use of the digital euro would not differ materially from the traditional electronic payment solutions. Anyone could open a digital euro account or wallet with their preferred payment service provider. The Eurosystem is still exploring different solutions to make the final offer user-friendly, secure and open to various social groups.
Commercial banks are expected to play a significant role in the introduction of the digital euro. From the perspective of the user, the role of private payment service providers in the digital euro ecosystem would be similar to that of existing payment solutions. Neither the ECB nor the euro area national central banks want to compete with the private sector and become directly involved in the provision of payment services. People would not be required to open an account with the central bank. The digital euro account would be opened by the person's (or company's) preferred payment service provider. This role, as well as the functions that commercial banks currently provide to their customers, would be preserved in the digital euro ecosystem.
The digital euro is not a money revolution, but rather its evolution. With the digital euro project, the Eurosystem seeks to create an open payment infrastructure that commercial banks and other payment service providers can use to develop innovative solutions for their customers. During the investigation phase, the Eurosystem is collaborating closely with market participants to identify areas where the issue of the digital euro and infrastructure development could benefit payment service providers.
We have received inquiries as to whether the digital euro will replace cash, which many people prefer for various reasons. It should be emphasised that the goal of the central bank digital currencies (CBDC) is to combine the benefits of central bank money (banknotes and coins) with the ability to use electronic payment instruments. If the digital euro is to be introduced, it will not replace the existing two types of money – non-cash means of payment and cash – but will instead supplement them with a third type of money. Therefore, people who value the benefits of cash will still be able to use it regardless of whether or not the digital euro is introduced.
What is the progress made by other countries towards the CBDC introduction? Currently, 114 countries representing more than 95% of the global economy are investigating the possibility of introducing the CBDC. The reasons and objectives for the introduction of CBDC may vary across countries. They are based on challenges faced by these countries in the area of electronic payments.
It can be observed that the factors like a sharp decline in the use of cash as well as an increase in the supply of private payment solutions, which can pose risks of monopolisation (stablecoins, current assets created by businesses), have contributed to CBDC investigation in the world’s most advanced economies. Meanwhile, developing countries appear to be more inclined to introduce the CBDC for the purpose of addressing the challenges of financial inclusion and reducing the costs related to the availability of electronic payments.
The CBDC "design" (or the functionality of its use) developed by the respective country also defines the objective of CBDC introduction. Therefore, the shape of this money may differ from country to country depending on the challenges to be tackled by the introduction of CBDC.