What is the digital euro and why does the European Central Bank want to introduce it to the market

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After months studying the issue and after an important public consultation, the European Central Bank (ECB) announced on Wednesday a pilot project to introduce the digital euro in the long term. An initiative that responds to the growing popularity of virtual payments, which have spread during the pandemic.

“Our work aims to ensure that in the digital age citizens and businesses continue to have access to the safest form of money, central bank money,” said ECB President Christine Lagarde.

This research phase will last two years and, according to the entity, will focus on the design and distribution so that the digital euro can meet the needs of Europeans and help prevent illegal activities, as well as avoiding a unwanted impact on financial stability and monetary policy.

At the end of the study, it will be decided whether to launch the digital euro, which could be implemented in 2025. If so, it will work with banks and companies to provide the necessary technology and payment services.

China was the first country to launch the central bank digital yuan (CBDC) to the testing phase and to complete the project to be able to carry out international transactions in its own currency.

But what is the digital euro?

The digital euro is an electronic form of money issued by the Eurosystem (the ECB and national central banks) that can be used by all citizens and businesses in the euro area. An important fact is that it will not replace cash, but will be a complement to it.

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The Eurosystem will continue to ensure access to banknotes and coins, and the digital euro will be presented as one more option when making payments.

Why a digital euro?

Cash is being used less and less and virtual payments have intensified since the pandemic began, but also with the digital euro, transactions could be faster and easier.

It would also support the digitization of the European economy and avoid dependence on digital means of payment issued and controlled from outside the euro area.

“Electronic payments are becoming increasingly popular, so a digital euro would guarantee that sovereign money (…) continue to be available in the digital age, “said Fabio Panetta, member of the ECB’s executive committee.

Participants in the consultation carried out by the ECB suggested that the digital euro be integrated into online and mobile banking and payment services through, for example, a mobile phone app. They also called for cross-border payments to be streamlined and cheaper.

The importance of privacy

According the ECB, the euro digital would increase the privacy of digital transactions, as it would allow people to make payments without sharing their data with third parties, “apart from what the regulations require.”

“This distinguishes it from private payments, where services are generally offered in exchange for personal data that is then used for commercial purposes,” Panetta said.

However, the ECB stresses that total anonymity is not possible because “it would constitute fertile ground for illicit activities and could prevent compliance with the rules on the prevention of money laundering and terrorist financing”.

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