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European Central Bank - Report on a Digital Euro


Central bank digital currencies (CBDCs) have recently become a major topic for central banks across a number of jurisdictions. With the accelerating pace of blockchain technology and the increasing popularity of digitally based assets, many central banks have been proactive in exploring the viability of CBDC and its role in the current financial system. The European Central Bank (ECB) has done just this with the recent release of their “Report on a digital euro”.   
 
The 54-page comprehensive report provides valuable insight into the risks, practicality and benefits of issuing a digital euro. The report is broken down into sections which include: the justification for the issuance of a CBDC; based on a number of forward-looking scenarios, the effects of an issuance on the banking sector, monetary policy, and the financial system; the primary legal obstacles to a digital currency issuance, functionality and design concepts, infrastructure, and areas for additional analysis and discussion.  
 
The report identifies several areas where the digital euro could provide benefits both within the European Union and abroad. High on the agenda is safety, privacy, autonomy and accessibility. One particular benefit discussed focuses on groups in society that do not have access to the banking system and rely heavily on cash to conduct financial transactions. In a scenario where there was a societal reduction in the use of cash, the digital euro could provide a viable financial transaction alternative for these groups. 
 
The report discusses several risks that the digital euro would present to the existing financial system.  Of particular concern is the potential that large numbers of depositors would transfer holdings held in the traditional banking system into digital euros held directly with the central bank. The report considers how this transfer could significantly increase the funding costs for banks thereby reducing available credit and leading to economic contraction. 
 
A number of solutions to curtail this potential exodus into digital euros are discussed. One solution would be to limit the number of digital euros that can be held by one individual. Another approach would be to use variable remuneration to control the attractiveness of the digital euro. The ECB will need to carefully consider the impact of these mechanisms to ensure that appropriate protections exist for the financial system. 
 
The legal implications of a digital euro were also addressed in the report. The findings of the report indicate that EU primary law does not prohibit the use of a digital currency as legal tender. The report does note however that there are legal implications depending on how the digital euro would be accessed by the end-user. Technical and functional aspects are also discussed including the possibility of creating two types of digital euro as well as whether to use a centralized or decentralized infrastructure. Cartan Group can provide assistance with bank systems architecture, KYC automation, wallet infrastructures, node operations, data-driven intelligence and merchant process transactions.   
 
While a compelling case was made for the issuance of a digital euro, there are many challenges that remain and issues that need to be resolved prior to its implementation. The report indicates that the ECB will continue to work towards the creation and issuance of a digital euro that works in harmony with conventional fiat currency. Central banks should take note of this report and consider developing their own strategies for the implementation of a CBDC. Financial institutions should also monitor the progress of central banks on the development of CBDC and carefully consider the impact of these changes on their business models. Our professionals have experience advising on CBDC projects and can provide tailored solutions to meet the needs of central banks, financial institutions, and other relevant parties. 
Brandon Caruana
Brandon Caruana

Recognized for building bridges between technology and business divisions, Brandon forges successful working relationships with all levels of team members, encouraging communication and cooperation to effectively provide easy to use systems which improve efficiency and increase profitability.

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