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This column focuses on the debate around the impact of a digital euro on bank funding since the announcement of the likely design features and the European Commission published its draft regulation on a digital euro. The authors argue that earlier concerns should be reassessed now that they have been effectively addressed by design choices which need to be incorporated into the analysis.
Central banks explained early on and in great detail the reasons why they are working on central bank digital currencies (CBDCs) (e.g. ECB 2020). Despite strong support by consumer organisations (BEUC 2023) and merchants (EuroCommerce 2023), and an overall positive reception by academic economists (e.g. Brunnermeier and Landau 2022), there are still critical voices. Some doubt the usefulness of CBDCs (e.g. Waller 2021, Bofinger 2022, Financial Times 2023; The Economist 2023), while others worry about their potential negative side effects and risks (e.g. bank disintermediation). Central bankers have taken these concerns seriously 1 and have not only explained further the rationale for CBDCs but also addressed them through CBDC design choices (ECB 2023c). In this column, we focus on the debate around the impact of a digital euro on bank funding since the ECB announced the likely design features and the European Commission published its draft regulation on a digital euro. We argue that earlier concerns should be reassessed now that they have been effectively addressed by design choices which need to be incorporated into the analysis.
On 18 October 2023, following the conclusion of the investigation phase of the digital euro project, the ECB’s Governing Council announced a specification of the functional scope and key features of a digital euro (see ECB 2023c, which aggregates and completes the findings from ECB 2022a, 2022b, 2023a and 2023b). The Governing Council also decided to proceed with the “preparation phase” of the project. The preparation phase focuses on additional experiments, selecting service providers, prototyping, and aligning with the ongoing efforts of relevant European co-legislators preparing the legal framework for a digital euro (Cipollone 2023). The actual decision on whether to issue a digital euro will be taken at a later stage, but not before the legal framework is in place and all functional features have been specified.
Based on ECB (2023c) and European Commission (2023), one can expect the digital euro’s features to include pan-European reach, legal tender status, and a high level of privacy. A digital euro would combine all the features of a modern digital payment solution, offering convenience and safety to its users. Just like cash in the physical world, a digital euro would allow citizens to pay with central bank money in the digital world. It would fill the gap left by the absence of a European electronic payment solution that is available and accepted free of charge throughout Europe, thereby strengthening the monetary sovereignty and resilience of the currency union (Schaaf and Bindseil 2023).
To avoid an increase in the footprint of the central bank and preserve the economic function of commercial banks, individual digital euro holdings would be limited. 2 Merchants would be able to receive and process digital euro, but not hold them. Moreover, digital euro holdings would not accrue interest. Last but not least, users would be able to seamlessly link their digital euro account to a payment account with their bank, enabling a ‘reverse waterfall’ mechanism. This eliminates the need to pre-fund the digital euro account for online payments, as any shortfall would be covered instantly from the linked commercial bank account, provided it has sufficient funds available. 3 ...
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