KEY POINTS

  • Facebook’s plan to launch its own “Libra” digital currency also raised stakes for global central banks
  • The ECB said this new form of currency would enable fast, easy and secure payments
  • Sweden’s Riksbank, the Swiss National Bank and the People’s Bank of China, have seriously considered forming their own digital currencies

The European Central Bank (ECB) has stated this year that it may seek to develop a “digital euro” currency and make it accessible to all citizens and companies, creating many benefits and risks.

The possible emergence of a “virtual euro” comes as the COVID-19 pandemic has pushed many consumers away from handling paper cash, while private cryptocurrencies like Bitcoin have become more prominent. In addition, Facebook’s (FB) plan to launch its own “Libra” digital currency also raised stakes for global central banks.

The ECB said this new form of currency would enable fast, easy and secure payments but would only complement the use of cash, not replace it.

The issuance and transference of digital euros would likely be done using the technology known as blockchain, which supports Bitcoin.

Other central banks, including Sweden’s Riksbank, the Swiss National Bank and the People’s Bank of China, have seriously considered forming their own digital currencies and moved ahead on these projects.

"Europeans are increasingly turning to digital in the ways they spend, save and invest," said ECB President Christine Lagarde. "Our role is to secure trust in money. This means making sure the euro is fit for the digital age. We should be prepared to issue a digital euro, should the need arise."

Fabio Panetta, a member of the ECB’s executive board, said a digital euro would “strengthen the international role of the euro.”

Panetta told the Financial Times, “We have been observing a decline in demand for cash as means of payments… It would have been unwise not to be ready to do as much as possible to provide as quickly as possible a [digital] means of payment by the central bank in case people ask for such services.”

The central bank continues to study the feasibility and efficacy of a digital euro and seeking public commentary. The process could take more than a year and a half.

Martin Sandbu, FT's European economics commentator, wrote that a digital euro is certain to arrive and perhaps as soon as the end of 2025.

“There is a [competitive] advantage for countries that pioneer official e-money, first because it contributes to an environment in which local businesses can invent related financial technology that piggybacks on to a digital payment system and, second, because users are likely to adopt more convenient payments solutions as soon as they are available -- for international payments in particular,” Sandbu wrote. “No central bank would want to be seen as a drag on fintech competitiveness or witness its constituents opt for alternative currencies en masse.”

Euractiv.com also pointed out that a digital euro would allow the public to “have deposits directly with the ECB” for the first time, a safer alternative to commercial banks (which could collapse) or to holding cash (which can get lost or stolen).

But a digital euro could raise other problems. For example, as FT noted, a lack of privacy – consumers’ spending patterns would likely be monitored by the central bank. In another worst-case scenario, a financial crisis might compel customers to suddenly move an enormous money out of commercial banks and into an ECB-backed digital currency.

In addition, a digital euro could be vulnerable to cyber-attacks.

Lukas Wiesflecker of DataDrivenInvestor.com spelled out how a digital euro would operate.

“The ECB provides each citizen with an account where the digital euros are stored. In other words, a kind of wallet,” he wrote. “Payment could then be made entirely only by smartphones.”

But Wiesflecker pointed out some inherent risks.

“Because institutions have little experience with digital currencies, the impact of a virtual primary bank currency on financial stability is uncertain,” he cautioned. “Besides, there is, of course, data protection and IT security. A digital euro can… only function based on a secure technical infrastructure. Otherwise, there would be a high risk of digital robbery and fraud.”