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The Digital Euro and its implementation in the near futuro

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The Digital Euro and its implementation in the near futuro

The digital euro is an initiative of the European Central Bank (ECB). It is a digital currency, equivalent to cash, let’s say that it is the same, the only difference is that one is in digital format and the other in physical format, the value of a euro in cash is exactly the same as a digital euro. This does not mean the substitution of one for the other, but as the European Central Bank has clarified, it is just another alternative form of payment, complementary to the existing ones.

It should not be confused with cryptocurrencies, being the ECB the only issuer of the digital euro. 

Internationally, many central banks are studying the emission of their own digital currency, in Bahamas they have already taken the step of issuing it, in China they are testing the emission in different cities of the country, in the USA they are waiting for the Federal Reserve to publish the report about the digital dollar, etc…. therefore it is a generalized fact where no country/central bank wants to be left behind.

Which are the reasons why the emission of the digital euro is being considered?

The main reasons behind this interest of the Central Banks are:

  • Competition among each other. If any of them does not follow what seems to be an international trend, they risk the appearance of another country’s digital currency in their own geographic area, thus affecting their economy. 
  • The threat of various private cryptocurrency initiatives that seek to establish a stable value. 
  • Another factor is the increasing disuse of cash, which, if it continues in this way, the central bank would lose relevance in the economy, so the issuance of digital currency is a good alternative against it. 
  • Finally, we must mention the digitalization and technological innovation that we are experiencing and that is advancing by leaps and bounds, including the private sector, which is causing the biggest concern. Central banks also want to boost the digitalization of the economy and are doing so through digital currency. 

How does the digital money system work?

The ECB wants to launch the digital currency on the market as a means of payment that will reach everyone, through the necessary electronic facilities. He explained that after the research phase, which is expected to end in 2023, if the decision to issue the digital euro is finally taken, it would still take some time before the digital euro is launched on the market.

About the structure and technology required for this, the options are being evaluated. What is clear is that, in order to distribute the digital euro to the end consumer, banks will be used as intermediaries, a mechanism to provide access, establish on-boarding, etc., and at the same time, as is obvious, merchant acceptance of this means of payment will also be necessary. 

Banks are already getting ready for the important role they will play in this process. 

Thus, in addition to the banks, the ECB will have an advisory group made up of industry experts. The advisory group will facilitate the homogenization of all these participants. 

At the same time, the implementation of the digital euro may represent a risk for financial stability as we know it nowadays, as there may be a shift of money deposited in commercial banks to the European Central Bank. This would be a disruption to the economy and to the financial stability of the market. This is why the ECB, which is aware of all this, wants to avoid it at all costs, suggesting that the digital euro should not be used as a means of savings or investment, which would inevitably produce this displacement, but instead be used as an alternative means of payment. 

When will the digital euro arrive?

In October 2020, the ECB issued a report on the digital euro and now it is in the research phase (24 months, which is expected to end in 2023), since a very rigorous work is necessary in view of the possibility of a change of scenario regarding the financial market and the consequences that, as we explained above, it may generate. If the ECB finally decides to go ahead with the issuance of the digital euro, a few more years of work and development will be needed before launching it to the market, being estimated that it will be in circulation in 2025. 

From Letslaw, as digital law professionals, we will keep you informed about the progress of the digital euro, as well as other current issues.

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