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The European Central Bank's “Libra moment” has arrived for the digital euro

"The European Central Bank has just announced that it is undertaking a formal research project to finally decide whether to launch a retail digital euro. It is the European Central Bank's 'Libra moment'."
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On June 19, 2019 Facebook announced its intention to launch its cryptocurrency Libra. It was the beginning of an earthquake of reactions from monetary authorities around the world, only aggravated by the communication, a short time later, that China had been preparing for years to launch a digital yuan, a CBDC issued to all audiences by the Central Bank of China.

Two years later, the European Central Bank has just announced that it is undertaking a formal research project to finally decide whether to launch a retail digital euro. It is the "Libra moment" of the European Central Bank. From now on a period of two years begins to study the most technical aspects of its design, structure, regulatory fit and use cases, without having made the political decision to launch it.

Since in September 2020 the first intentions with the "Report on digital euro", the works of analysis of previous experimentation they have not ceased and they have confirmed the technical validity of the assumptions and requirements of the principles of the first document. These experimentation works have validated the combined usability of existing infrastructures such as TIPS and blockchain structures, the possibility of making payments on the necessary scale and adding programmability functionalities with smart contracts. They have tested CBDC models based on accounts and in Tokens, privacy-compliant identification solutions have been explored, and tested on unconnected devices to enable transactions off line.

The work ahead mainly involves developing user-level functions that are useful for adoption, while delving into the technical developments of its architecture and distribution. And of course, while analyzing the characteristics for the digital euro to be a means of payment and not a store of value, and how it will be distributed outside the euro monetary zone.

Much work remains to be done in order to design a digital euro compatible with current bank money and that at the same time does not paralyze innovation in payments (principle “do not harm ”) that requires connectivity and transactionality online y offline with new digital devices. Undoubtedly, over the next two years we will see new innovations in payments with new distributed digital platforms and it remains to be seen the role that cryptocurrencies will have, if they do, especially stablecoins.

My understanding is that the use case analyzes will be of a similar order to those that Accenture is conducting in concert with the Digital Dollar Foundation for the case of a dollar CBDC. Perhaps the work being carried out by payment platforms such as BIZUM in Spain is also a good approximation, which although restricted to mobile payments is gradually including new operations and aims to reach 20 million users in Spain. It will also be necessary to analyze the compatibility with payment platforms such as the European Payment Initiative (EPI), still under study, with the digital euro itself. EPI is a joint initiative of leading European banks to promote account-to-account payments and also through a European card, with the aim of creating a European payment champion, something that does not exist in the face of the dominance of the American card giants or the growing control of payments through mobile phones by Apple and Google with their payment gateways.

The inclusion of use cases through the large North American or Chinese platforms will be key, BigTechs, because there are no comparable European technology platforms. A digital euro that is part of the daily life of Europeans and that does not circulate through the big BigTechs does not seem conceivable. There, however, the strength of the ECB will be felt much more than that of commercial banks in their individual negotiations for the use of their cards, and BigTechs will have to be regulated in their activities as payment providers.

Therefore, there is a lot of work to be done in each specific country, because the digital euro has to be adapted to the citizens of each country. Without forgetting that the digital euro has to backbone the economic and social life of Europeans, and therefore use cases have to be expanded to use. cross border with other European countries. A third step is to decide which are the use cases cross border y cross currency, possibly the aspect even less studied, since the analysis of the CBDC until now has taken on more dimensions of the internal market in each country.

The ECB has announced the intention of creating a Market Advisory Group (MAG) made up of professionals who advise on the work to be carried out during this study phase. This MAG should contemplate this triple typology of use cases with sufficient breadth to collect the wealth of cases that each country requires.

Finally, like all projects, the definition of the success of this study phase should be established ex ante, since it represents the reference against which to measure progress and the final result obtained.

  • Proven use cases and alignment with stakeholders involved.
  • Confirmation of operational scalability of transactions.
  • Technological availability, both at the level of infrastructures and devices.
  • Outline of a launch plan.

Once you have successfully arrived here, the political decision that the launch of the digital euro implies will have to be taken. For this, the banking sector must have defined a model of future coexistence (in fact, there are already initiatives in this regard) and the digital euro must have defined a foreign policy, not only its limited use, compatible with cash, within EU countries in coexistence with the banking system and allowing private innovation.

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