Launch of the digital euro: what changes? (episode 3)

While there were no Central Bank Digital Currency (CBDC) projects in 2016, these projects have proliferated in recent years: although there are only 2 countries that have adopted digital currencies (Nigeria and the Bahamas), nearly 93% of central banks are now considering implementing these digital currencies. The European Central Bank (ECB) is no exception to the rule: promising to anchor the currency in this new technological era, it is currently experimenting with a digital euro project.

Sources of inspiration for the project

Digital currencies are not a new concept: they have existed since 2009, the date of creation of Bitcoin, the first cryptocurrency. They are based on the blockchain: a decentralized system for verifying transactions. In summary, instead of a central authority, several computers (called miners) compete to verify the conformity of a set of transactions (called a block) and the computer that can decipher the transaction first wins a reward: this makes it possible to ensure verification of transactions without the need for a central authority. Since the creation of Bitcoin, cryptocurrencies have multiplied and we can now distinguish 2 types: “classic” cryptocurrencies (like Bitcoin or Ethereum) whose price varies greatly and stablecoins (like Tether or USDC). which aim to always be worth $1 (or any reference currency but they generally follow the rate of the dollar).

Stablecoins are particularly popular in the world of cryptocurrencies because they allow cryptocurrency gains to be converted directly into stablecoins and not into dollars or euros. This allows you to have fewer fees, to stay in the world of cryptocurrencies and to maintain a certain anonymity. However, unlike the currency whose price they replicate, stablecoins are not guaranteed by a central bank: thus, if the company goes bankrupt, the stablecoin collapses. This is what happened for example with the Terra Classic USD (USTC) stablecoin from Terra Luna due to an error in their algorithm: from May 10 to May 12, 2022, this stablecoin supposed to remain at $1 suddenly drops to 0 .08$, causing its holders to lose nearly $18 billion.

What is a central bank digital currency (CBNC)?

Understanding how cryptocurrencies work is very important to understanding the similarities and differences between central bank digital currencies and stablecoins. First of all, for the common points, both are based on the blockchain and are obviously virtual. The differences are much more numerous: MNBCs are guaranteed by central banks and therefore a scenario like that of Terra Classic USD cannot theoretically occur, they are therefore not decentralized and do not guarantee anonymity but, on the contrary, may increase the risks of non-respect of the privacy of its users.

MNBCs that are multiplying

Only Nigeria (with the e-Naira) and the Bahamas (with the Bahamian sand dollar) already have their MNBCs but many states are also interested in these currencies. The trend is even general (with the exception of LDCs) because countries, whether emerging or developed, are considering setting up an MNBC: thus, in the G20, only Argentina does not have a project of MNBC. Although the majority of these countries have a project, the stages of advancement are however different: developing and non-Western countries are ahead, mainly because MNBCs can promote the financial inclusion of their citizens. China is testing a digital yuan with 260 million of its inhabitants and then plans to extend it to the entire country. Brazil and India are also considering this project very seriously, while Russia, Australia and South Korea have launched some pilot tests. As for the United States, they are also considering the issue but have not yet carried out any experiments and do not have a precise timetable.

An MNBC project for Europe: the digital euro

In October 2021, the ECB began to reflect on the relevance of adopting a digital currency by launching an “investigation” phase. 2 years after this launch, it decided to continue research by announcing a “preparatory” phase aimed at carrying out concrete experiments, developing operating rules and selecting service providers to set up the digital euro infrastructure. . 2 projects are being studied in this context: an interbank digital currency (which would only be used for transactions between banks) and perhaps, ultimately, a retail digital currency (which would be used for transactions between individuals). If this phase is conclusive, laws can be adopted for the establishment of the digital euro and the final decision to adopt or abandon this MNBC will be taken by the Governing Council of the Central Bank, which brings together the 6 members of the ECB executive board and the 20 governors of national central banks. If this decision is made, Europeans can then expect to have digital euros by 2027-2028.

The digital euro: a debated project

If the horizon seems distant, the digital euro project is nonetheless debated by the advantages and disadvantages that it can bring to the European system. Interbank money being the least ambitious project, it is the subject of relatively little criticism: it could thus allow banks to exchange money faster, cheaper and more secure.

Retail digital currency, for peer-to-peer transactions, faces much more debate. In addition to the classic advantages of blockchain as for interbank digital currency (faster, cheaper and more secure transactions), the creation of this currency would lead to the creation of an ECB bank account for individuals. Concretely, instead of depositing their savings in their account at BNP Paribas, Deutsche Bank or Banco Santander, a European could deposit their euros in a bank account managed by the Central Bank and all, if this initiative is implemented. place, free of charge. This could reduce citizens' spending on banking fees, facilitate cross-border payments which have high or even prohibitive fees (for discounts for example) and promote financial inclusion in the euro zone: almost 13 million European citizens have no no bank account (they are not all in the euro zone but this number is still significant). In addition to this, the digital euro could help limit European dependence on American payment companies (such as Visa or Mastercard for bank cards or Paypal or Stripe for electronic wallets) which control the vast majority of the market.

Commercial banks, however, fear that the digital euro will replace part of their activities, depriving them of an important source of income. The project also raises some concerns about the protection of privacy: unlike cryptocurrencies, digital euro transactions will not be anonymous and some are concerned about the centralization of the system. Finally, the IMF recommends that central banks adopt ecological digital currencies: the Proof of Work blockchain (Bitcoin blockchain mechanism), which brings millions of computers into competition, is energy-intensive and therefore polluting. In 2021, during its peak, Bitcoin consumed more energy than Norway.

These criticisms are not insurmountable: for example, the ECB wishes to limit the number of digital euros that can be deposited into an account to €3,000; a legislative framework is also planned to guarantee the privacy of citizens (the euro digital should even be more anonymous than transactions in euros made with its bank but less anonymous than cash) and it could adopt another type of blockchain than the Bitcoin blockchain such as the Ethereum blockchain for example which is much less energy intensive. In any case, experiments continue in Europe as elsewhere: there is no doubt that, in an increasingly digitalized Europe (where cash payment only represents 10% of total transactions), debates on the digital euro will take more and more space.

Sources: Definition and application of the functioning of the blockchain: https://cryptoast.fr/qu-est-ce-que-la-blockchain/ Definition and application of the functioning of stablecoins: https://finance-heros.fr/stablecoin /#:~:text=The int%C3%A9r%C3%AAt%20of the%20stablecoin%2C%20c,the%20100%20billion%20of%20dollars. Terra USD price: https://coinmarketcap.com/fr/currencies/terrausd/ Explanation of the differences between digital currencies and cryptocurrencies: https://www.youtube.com/watch?v=HsO79Uohjx4 Development of digital currencies central banks around the world: https://www.imf.org/fr/Publications/fandd/issues/2022/09/Picture-this-The-ascent-of-CBDCs Definition and explanation of the digital euro: https: //www.bbc.com/afrique/articles/cz936v2d1qko Description of the digital euro (EN): https://www.youtube.com/watch?v=yqns1KPJi18 Number of unbanked people in the EU: https: //www.wsbi-esbg.org/number-of-unbanked-adult-eu-citizens-more-than-halved-in-the-last-four-years/ Digital currencies and ecology: https://fr.cointelegraph .com/news/imf-recommends-eco-friendly-cbdcs-and-non-pow-mechanisms-for-payments Bitcoin electricity consumption (EN): https://www.visualcapitalist.com/visualizing-the- power-consumption-of-bitcoin-mining/

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