Policy Brief - Digital Euro: Catching Up and Browsing the Daisy

Executive Summary

For several years now, the ECB has been engaged in preparatory work for the introduction of a central bank digital currency, the digital euro. Its work has advanced our understanding of the complex issues involved and has contributed to a line of research actively pursued in many parts of the world.

After revisiting the pros and cons, this paper concludes that, all in all, the rationale for introducing an ECB-sponsored digital euro for citizens, retailers, and producers, is not solidly established. Today’s highly dynamic, innovative, and efficient digital payment ecosystem does not require such an instrument, which would unavoidably duplicate existing applications and probably struggle to match private innovation.

The paper also offers a short survey of international experiences regarding CBDCs and alternative digital solutions. What strikes in this overview is the extreme diversity of orientations. Developing countries are interested in promoting financial inclusion and literacy, bypassing their lack of developed physical banking networks. Emerging countries either take different directions altogether (Brazil), or experiment with pilot CBDCs (India). China stands out in being fully committed to a digital yuan, clearly – though not explicitly – motivated by internal control and geopolitical expansion. Despite extensive public intervention, however, the e-CNY has not attracted so far much favor among the population, amid fierce competition from private competitors like Alipay and Tencent.

The US Federal Reserve seems inclined to explore wholesale central bank-based digital solutions to improve the efficiency of the international payments system. A retail-based CBDC seems ruled out for the time being. Switzerland, a country whose financial sector has a small but significant international role, has undertaken moves in the same direction.

The ECB has so far placed its bets on a retail CBDC, but in our view would be well advised to pay attention to other options as well. The need to improve the functionality of the international payment system is long-standing and solidly established. 

CBDCs can help in this regard (Adrian, 2023). The ECB should actively join the Fed and other central banks in studying a wholesale, interoperable multi-currency version of CBDC capable of making the international large-value payments more efficient and safer. 

Such an instrument would also have value as a potential backup in case market or technical failures require public intervention. More generally, it is important that in conducting its preparatory work the ECB coordinates with other Western central banks. In a highly interdependent global monetary and financial system, a situation in which the main central banks take markedly different orientations on CBDCs is hardly advisable or even conceivable.

IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.

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