A European Union prepares to test the digital euro in 2021

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European Union prepares to test the digital euro
The European Union prepares to test the digital euro

Facebook announced:

In June 2019, Facebook announced that it would launch its digital currency pegged to a basket of sovereign currencies this year. The Libra project (today called Diem after several changes) shook the governments and central banks of half the planet.

A digital currency with direct access to the social network’s 2.7 billion users could threaten countries’ monetary sovereignty and affect financial stability. This year the European Union prepares to test the digital euro currencies in some countries.

Rules:

The response did not just come in the form of a cascade of warnings towards Facebook and even new rules, such as those presented by the European Commission last September. Central banks around the globe began to develop digital versions of their currencies.

Some had years of advantage, like Sweden or China. Others joined later, like the Federal Reserve. Meanwhile, the ECB got fully into the task, with strategic discussions, public consultations, and even the possibility of launching a pilot project this year to test the digital euro’s viability.

Every step is measured; every detail is calibrated because the consequences for the financial system can be enormous. Because the digital euro will not only become a payment system that will make life easier for Europeans in an increasingly digital ecosystem, although coins and banknotes will not disappear. This new means of payment would go directly to citizens, who would deposit at the same BCE.

Citizen savings:

The derivatives are multiple and profound because Europeans could decide to have all their savings in digital euros to keep their money in the ECB’s safe hands, thus ending the banking crises of the past. However, it would end one of the primary sources of financing for banks, jeopardizing the essential work they play in the economy, and threatening financial stability if the transition is mismanaged.

European Union prepares to test the digital euro
European Union prepares to test the digital euro

The opportunities are immense, but so are the consequences of every decision. For this reason, the ECB and its colleagues around the world are thinking well about the characteristics of these digital currencies, the possible limits to be imposed, or the role that banks would play in this future system.

It will be decided in mid-2021 whether or not to launch a pilot project to test feasibility.
The ECB published a detailed 54-page report last October in which it reflected on some of these aspects. The institution launched a public consultation, which will conclude in January, with banks and other actors to probe them on this digital euro project. Depending on the answers it receives and its internal reflection process, it will decide in mid-2021 whether to launch a pilot project to test the viability of this digital euro and gather more practical knowledge, sources from the Bank of Spain explain.

A hunch from Lagarde

Christine Lagarde, the president of the ECB, is inclined to think that the digital euro will become a reality. It is your “hunch,” although it will still take two to four years. The French explained that it would take time for its technological development and reflect on aspects such as money laundering controls and the financing of terrorism.

This is one of the main concerns with current cryptocurrencies like Bitcoin, given its users’ anonymity. However, digital euros would not operate in the dark; they point out from the Bank of Spain.

Spanish regulator:

Spanish regulator sources warn that the time horizon suggested by Lagarde may turn out to be somewhat optimistic. Sources from the Spanish regulator argue that the time horizon suggested by Lagarde may be somewhat optimistic, and for this, they put the example of China. Its central bank was one of the pioneers in the development of its digital currency. However, after five years, the digital yuan is still in the experimentation phase with several pilot projects.

Now, the ECB is in dialogue with national and European political authorities and associations because aspects such as the control of privacy will be consulted with actors beyond the monetary sphere.

European Union prepares to test the digital euro
European Union prepares the digital euro

Cryptocurrencies:

They also collect practical experience to see its technical feasibility, although it is not clear if a distributed ledger technology (such as blockchain) will be used, the same user as the basis for other cryptocurrencies Bitcoin.

Pilot Project:

Simultaneously, the ECB is preparing the pilot project, which will decide whether to launch in the middle of this year. Finally, it maintains a constant dialogue with other central banks immersed in similar projects since it wants to favor its digital currencies’ interoperability to avoid fragmentation in cross-border payments.

However, the fears that still arouse are powerful. These digital assets raise “profound questions about the shape of our financial system and the implications for monetary and financial stability,” Bank of England Governor Andrew Bailey warned in September.