The Bank of Stockholm issued the first European currency in 1661. Today, more than 360 years later, our monetary system is dealing with rapidly declining cash usage and is considering the Central Bank Digital Currency (CBDC) as one solution. But what exactly is digital currency, and why do we require it?
Behind the CBDC
To begin, why did the CBDC discussion originate in the first place? There are numerous causes for this, but the most important are financial inclusion, efficiency, reduced cash payments, monetary sovereignty, and total digitalization.
Financial inclusion has become an increasingly sensitive regulatory issue. And CBDC is considered as a solution for reducing financial exclusion by providing a safe, low-cost, and accessible payment system to anybody with a smartphone or internet connection, particularly in developing nations where traditional banking services are limited.
Furthermore, according to European Central Bank data, cash is still the most often utilised payment option at the point of sale in the eurozone, despite the fact that only 59% of transactions are conducted in cash. This is a considerable decline from the 72% reported three years ago and the 79% recorded in 2016.
And, of course, with fintech developments revolutionising the financial world, digitization is impacting our daily lives to an ever-increasing extent. More people, particularly younger generations, are looking for more efficient and autonomous ways to safeguard their money and are turning to cryptocurrency. This also poses a risk to monetary sovereignty. CBDCs issued and regulated by central banks, on the other hand, will enable them to keep control over the money supply and safeguard the financial system’s stability.
Digital Euro – what, where, when?
Now that we understand why CBDC was created, let us look at what Digital Euro is. To put it simply, it is the same euro we use every day, but this one is trapped in a digital environment.
The digital euro is poised to become the Eurozone’s CBDC, similar to cryptocurrencies but with several distinguishing characteristics. It is a virtual currency having legal value guaranteed by the European Central Bank that may be used in conjunction with banknotes to make payments throughout the Eurozone’s 19 member countries. The digital euro is expected to be a quick, safe, and innovative payment mechanism for both businesses and individuals.
Currently, 114 central banks are investigating the CBDC. Most are still in the research stage, while some are already testing and are just a few steps away from going live. To some extent, this has become a race among banks, particularly among G7 countries, to see who will be the first to set the rules and advance our already highly globalised and digitised economy to the next level.
According to the CBDC tracker, the European Central Bank is now in the development stage of the Digital Euro. Christine Lagarde, President of the European Central Bank, voiced her support for the digital euro in May 2022, and the ECB announced its partnership with Caixabank, Worldline, Amazon, EPI, and Nexi to build prototypes of various digital euro functionalities in September 2022. In November, ECB President Lagarde said that legislation clarifying the privacy features and legal status of the digital euro will be presented soon. The trial program is set to begin in 2023.
Want to join the conversation about the European digital landscape or learn more about it? Join the ‘How Europe is taking the lead in shaping the Digital Economy’ session at Amsterdam Fintech Week 2023! Get your tickets now