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Is the digital Euro on its way?

Is the digital Euro on its way?
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The European Central Bank (ECB) is mulling over plans for the digital Euro, says stocks and shares ISA financial firm Saxo Markets. Here’s how it might work.

What is the digital Euro?

The digital Euro would complement the existing Euro but would be completely electronic, so no notes or coins.

According to the ECB, a digital currency would give people greater choice when it comes to payments. It would also make cross-border transactions simpler and safer.

How is the digital Euro different from a cryptocurrency?

One of the main points of cryptocurrency is that it’s decentralised. In other words – no single organisation or government controls it. A digital Euro on the other hand would be controlled and overseen by a central bank – the ECB.

Fundamentally, it will be the same as any other type of fiat currency, just a digital version of it. So, in theory, this should mean it is as ‘safe’ as a tangible currency that has banknotes but less volatile. 

Another difference is the proposed technology behind the digital Euro. Cryptocurrencies (like Bitcoin) are managed via a public ledger (the blockchain) that anyone can access.

The ECB has made it clear that control over the digital Euro will be limited. The bank’s technical guidance states ‘the back-end infrastructure should be ultimately controlled by the central bank.’

Why is a digital Euro important?

In its quarterly outlook, Saxo Markets highlights the potential risk if central banks don’t adopt digital currencies. The potential danger is that largely unregulated cryptocurrencies become the norm for cross-country transactions. This, in turn, could destabilise central banks, having long-term consequences for all of us.

Digital currencies, also called Central Bank Digital Currencies (CBDCs) aren’t new. Several countries are considering their own or have already launched pilot projects. These include the Swedish e-Krona, the e-Yuan from China, and the Sand Dollar from the Bahamas.

In its digital Euro explainer, the ECB makes it clear why a CBDC is important. It says: “European payments must be underpinned by a competitive and innovative market capable of meeting consumer demand while preserving European sovereignty.”

In other words, it’s about choice but also making sure that the ECB gets there first and that no-one else undermines the bank’s authority. 

Are digital currencies the future?

The ECB’s statement shows that central banks are taking the rise of cryptocurrencies very seriously.

But before the ECB decides or finalises anything, it wants to be confident about key issues. These include things like privacy and compliance. But, if policymakers and the powers that be go for it, a digital Euro could be launched in around four years time.

Anders Nysteen, senior quantitative analyst at Saxo group, points out that regulatory initiatives (if implemented) “can pave the way for Europe to become a global standard-setter, as well as boosting the sentiment around digital assets.”

What about a digital pound?

So, what about us in the UK? Are we likely to pay for goods in digital pounds?

Well, not yet. The Bank of England has set up a CBDC task force to look into the idea of a digital pound but nothing’s been decided yet.

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