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European Central Bank Moves to ‘Preparation Phase’ on Digital Euro

Following a two-year investigation, the ECB is starting to lay the foundations for the potential issuance of its CBDC, although a final decision on whether to launch the digital euro has still not been made.

ECB President Christine Lagarde Digital Euro

The Governing Council of the European Central Bank (ECB) has this week decided to advance to the ‘preparation phase’ of its digital euro project, according to a press release. This follows a two-year ‘investigation phase’ covering the possible design and distribution models of its potential central bank digital currency (CBDC) for the euro zone.

The preparation phase is intended to “lay foundations for a potential digital euro,” and pave the way for an eventual future decision on its issuance. This will include the finalization of exactly how the CBDC will work and the selection of suitable providers to develop the platform and infrastructure.

The phase will officially begin on November 1, 2023, and is initially envisioned to last for two years. At the conclusion of this period, the Governing Council will make a decision on whether to continue on to the next stage of preparations, which the press release suggests will also “pave the way for the possible future issuance and roll-out of a digital euro.”

So this new ‘preparation phase’ would seemingly appear to involve spending two years preparing to make the decision whether to move on to the next ‘preparation phase’. Still, you can never be too prepared, and preparation is important according to ECB President Christine Lagarde:

“We need to prepare our currency for the future. We envisage a digital euro as a digital form of cash that can be used for all digital payments, free of charge, and that meets the highest privacy standards. It would coexist alongside physical cash, which will always be available, leaving no one behind.”

The results of the prior investigation phase, which began in October 2021, were also published this week. The report contains lots of noble claims regarding financial inclusion and privacy; for example, the Eurosystem “would not be able to identify any individuals making or receiving digital euro payments.”

However, the issuing and KYC/AML processing of accounts would still be carried out by payment services providers (PSPs) including (but not limited to) commercial banks, and holdings of digital euros would be limited “to prevent excessive outflows from commercial bank deposits into digital euro.”

We have raised concerns about these aspects of the project before, as presumably the PSPs would be able to identify the individuals making payments, and the insistence on not upsetting the status quo (and profits) of the commercial banks removes several of the potential benefits that a CBDC can bring.

The final design will be adjusted to account for any requirements necessary once the European Union’s legislative process is complete, but it is currently unclear whether any of these aspects will be addressed. We shall continue to Observe.