Europe's Current Status on Central Bank Digital Currencies (CBDCs)
The European Central Bank (ECB) embarked on a significant journey in October 2021, with the aim of creating a digital euro. This digital currency is designed to have cash-like features, pan-European reach, and the highest level of privacy achievable.
The primary drivers for the digital euro are alignment with payment preferences, simplification, and Europe's strategic autonomy. A retail CBDC would provide the public with a digital equivalent to cash, while a wholesale CBDC would be used for interbank payments and securities transactions in central bank money with new technologies.
To limit the appetite for the digital euro and avoid disintermediation from bank accounts, the ECB has put several mitigation measures in place. These include holding limits for end users, waterfall and reverse waterfall functionality, and not paying interest rates for the digital euro.
The ECB is exploring three potential solutions for the settlement in central bank money on DLT-based transactions. These solutions focus on scalability, privacy, and efficient transaction throughput to support the digital euro's infrastructure. The European Central Bank has tested three interoperable solutions for central bank digital currency based on distributed ledger technology using public blockchain platforms like Ethereum, Solana, and Layer-2 scaling solutions like ZK-Rollups and bridge protocols to enable cross-chain interoperability.
Central banks worldwide are increasingly engaged in the research, experimentation, and deployment of central bank digital currencies (CBDCs). In 2023, 94% of central banks globally were involved in some form of CBDC-related activity. The increasing number of high-profile bond issuances using distributed ledger technology (DLT) in Europe has accelerated in 2023 and 2024.
The financial industry is pushing strongly for the introduction of a European wholesale CBDC. The ECB has undertaken practical work with market stakeholders focused on three different interoperability solutions offered by the national central banks Bundesbank, Banca d'Italia, and Banque de France. Distributors will mainly be payment service providers, including banks, who will take care of the exchange, customer relations, and services that go along with the digital euro.
However, there are risks and challenges associated with blockchain technology. These include regulatory barriers, scalability, inefficiencies in decentralised systems, and the accelerated risk of bank runs due to programmability and structural pro-cyclicality. The availability of the digital euro depends on technological progress and the legislation currently under discussion by the EU parliament and member states. Deutsche Bank Research expects the digital euro to be potentially available in 2028/2029.
The ECB's approach for both retail and wholesale CBDCs was outlined in a webinar hosted by Deutsche Bank Research on 21 November 2024. The work falls across two areas: experiments and trials. The BIS now sees the likelihood that central banks will issue wholesale CBDCs by 2030 exceeding the likelihood of retail CBDC issuances. Marion Laboure, Macro Strategist at Deutsche Bank Research, states that retail CBDC projects are generally more advanced than wholesale ones.
Piero Cipollone, a member of the ECB's executive board, highlighted the potential to build an integrated European solution based on Blockchain to realise the European capital markets union. The TIPS Hash Link by Banca d'Italia uses a form of the TARGET Instant Payment Settlement (TIPS) infrastructure.
The ECB kicked off its retail CBDC project with an investigation phase in October 2021, and is currently in a preparation phase with a potential development and roll-out phase possibly starting in November 2025. The Full-DLT Interoperability by Banque de France allows both the asset and cash legs to run on two interoperable blockchains.
As the ECB continues its journey towards a digital euro, it is clear that this digital currency has the potential to revolutionise Europe's financial landscape, providing a secure, efficient, and modern means of payment for its citizens and businesses.
){kind=link}