The development of digital means of payment, crypto-assets, distributed ledger technology (DLT) and other technological developments in electronic payments have opened the way for central banks to consider issuing some form of digital cash. The initial debates were triggered by a series of academic papers published by the Bank of England (BoE)1. However, given the profound implications of this proposal for key topics for central banking and financial regulation—in areas such as monetary policy, financial stability, payment systems, financial inclusion and anti-money laundering (AML), inter alia—the discussion rapidly moved to the policy arena2.
Most central banks have analyzed the topic over recent years, but many were initially hesitant to move forward because of the problems related to anonymity and disruption of financial intermediation. In very simplistic terms, initial analyses concluded that if central bank digital currencies (CBDCs) replicated the anonymity of cash, they would facilitate illegal transactions, thus raising AML-related issues. And if CBDCs were identified in the so-called account modality, they would compete with bank deposits and disrupt financial intermediation.
The dilemma between facilitating money laundering or competing with private banks in the provision of deposits led many central banks to keep their CBDC projects on hold. In this context, the announcement by Facebook of the launch of Libra in June 2019 reignited interest in CBDCs for many central banks. The threat of a powerful BigTech issuing a stablecoin that might compete with fiat currencies triggered a reaction in the central banking community. On the one hand, authorities raised questions about the nature of Libra and its regulatory treatment; on the other hand, they looked back at plans for CBDCs with more positive attitudes.
This fresh look at CBDCs was accompanied by a more pragmatic approach, with more nuanced proposals that lessened the dilemmas implied in the first, more academic papers. In particular, some of these new proposals focused on modalities that rely on public-private partnerships rather than full provision by the central bank3. There was also increasing elaboration on the variants that limit the extent of the dilemmas posed by anonymity. Meanwhile, the COVID-19 crisis brought about a stigma of cash that also stimulated the debate. An increasing number of central banks have become convinced that they should offer an electronic means of payment that links them directly with the population and do not rely entirely on a few private foreign payments providers. According to a Bank for International Settlements (BIS) survey, nearly 60 percent of central banks are likely or possibly issuing a CBDC in the medium term (one to six years)4.
The euro is not an exception to this trend. The European Central Bank’s (ECB’s) and euro area’s central banks’ initial reluctance towards CBDCs gave way to an increasing interest in the topic after the Libra announcement and the development of pilots by other central banks, in particular China. The High-Level Task Force on Central Bank Digital Currency was set up, and it produced a digital euro report in October 20205. This report adopted a very pragmatic approach, in which the issuance of a digital euro would be conditional on the materialization of a series of scenarios, in particular (i) to support the digitalisation and strategic autonomy of the European economy; (ii) to respond to a significant decline in the use of cash as a means of payment; and (iii) if there is significant potential for foreign CBDCs or private digital payments to become widely used in the euro area.
According to the report, the digital euro would be designed as a means of payment, not a store of value—a key requirement if it is to (partially) replace cash but not bank deposits6. It would be based on public-private cooperation, with the public sector providing the infrastructure and the private sector facilitating the direct interaction with the public, taking advantage of their respective comparative advantages. The dilemma for central banks in such a situation consists of making the digital euro attractive enough to partially replace cash but not so attractive that it replaces deposits. This can be done through limits on the holdings of digital euros or through the use of interest rates to penalize holdings above certain thresholds.
The publication of the digital euro report triggered a debate on the legal basis for its issuance. This is an important question since the institutional configuration of the European Union (EU) complicates any changes in the legal basis of EU institutions, especially when they require reforms of the EU Treaty. It is crucial, therefore, to determine whether the ECB can issue a digital form of the euro under the present treaties and ECB Statute, or whether this would require legal changes and the involvement of other EU institutions, such as the Commission, the Council and the European Parliament. The ECB report devotes only a few lines to this topic, stating that its preliminary analysis indicates a legal basis for the issuance of the digital euro but that more careful examination is required.