Digital Euro Begins Two-Year Prep Phase at European Central Bank

The European Central Bank (ECB) is closer to launching a digital euro.

The ECB announced in a Wednesday (Oct. 18) press release that it will launch a two-year preparation phase for its central bank digital currency (CBDC) Nov. 1.

The phase will involve finalizing a rulebook for the digital euro and finding providers that could help build a digital euro platform and infrastructure, according to the release.

“It will also include testing and experimentation to develop a digital euro that meets both the Eurosystem’s requirements and user needs, for example in terms of user experience, privacy, financial inclusion and environmental footprint,” the release said.

After two years, the ECB’s Governing Council will decide whether to move to the next stage of preparations, to set the stage for the possible issuance and rollout of a digital euro, per the release.

The digital euro project has critics, Reuters reported Wednesday. They mainly include bankers and regulators worried the project will pull deposits from the commercial sector, as well as academics, the European Union’s privacy watchdog and some consumer groups.

“So far, the ECB has not been able to clearly communicate the added value of the digital euro,” Markus Ferber, a German member of the European Parliament, said in the report.

CBDCs also came under fire in the United States this week. Speaking at a Harvard Law School event Tuesday (Oct. 16), Federal Reserve Governor Michelle Bowman said she is concerned about the potential risks tied to digital currencies.

Bowman said she has yet to see a compelling argument that a CBDC could reduce friction within the payment system compared to alternatives, such as the FedNow® Service instant payment system.

Meanwhile, research into CBDCs suggested they might help offset volatility in cross-border payments, as well as improve transparency, and by extension, liquidity.

For example, the Bank for International Settlements (BIS), along with the central banks of Singapore, Switzerland and France, announced in September that they had concluded a test of wholesale CBDCs with a focus on foreign exchange (FX).

In a paper explaining its findings, the BIS and the central banks said the benefits of CBDCs “include supporting simple and automated execution of FX transactions, providing options to broaden the range of currencies, eliminating settlement risk and enabling transparency.”

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