The European Central Bank (ECB) has announced further developments in its project to introduce a digital version of the euro. 

The Governing Council decided to advance to the next phase of the project, which is the preparation phase, slated to begin on 1 November 2023. 

This milestone follows the conclusion of the investigation phase started in October 2021, aimed at exploring feasible designs and distribution models for a digital euro.

The preparation phase is set to last two years and will focus on finalising the digital euro rulebook and selecting providers to develop the infrastructure. 

It will also involve rigorous testing and experimentation to create a digital currency that not only meets the Eurosystem’s criteria but also user demands in areas like user experience, privacy, financial inclusion, and environmental footprint.

“After two years, the Governing Council will decide whether to move to the next stage of preparations, to pave the way for the possible future issuance and roll-out of a digital euro,” the ECB said. 

Importantly, the commencement of this phase does not imply a decision to officially issue the digital euro; such a decision will be made only after completing the European Union’s legislative process.

The digital euro as conceived by the ECB will serve as a digital form of cash available for all types of digital payments throughout the euro area. 

It will be widely accessible, free for basic use, and will function both online and offline. The ECB aims to offer the highest level of privacy and enable instant payments settled in central bank money.

Christine Lagarde, President of the ECB said, “We need to prepare our currency for the future. We envisage a digital euro as a digital form of cash that can be used for all digital payments, free of charge, and that meets the highest privacy standards. It would coexist alongside physical cash, which will always be available, leaving no one behind.”

The initiative is expected to fill gaps in the current payment landscape, offering a set of features no existing digital payment instrument currently provides. 

Among these are person-to-person payments, point-of-sale transactions, e-commerce, and government-related payments.

“As people increasingly choose to pay digitally, we should be ready to issue a digital euro alongside cash,” said Fabio Panetta, an ECB Executive Board member and Chair of the High-Level Task Force on a digital euro. 

“A digital euro would increase the efficiency of European payments and contribute to Europe’s strategic autonomy.”

The project has garnered its share of critics, including bankers, regulators, academics, the European Union’s privacy watchdog, and consumer advocacy groups. 

Markus Ferber, a German member of the European Parliament for the conservative European People’s Party said, “So far, the ECB has not been able to clearly communicate the added value of the digital euro.”

Nevertheless, the ECB asserts that the digital euro will promote resilience, competition, and innovation in the European payment sector, and it plans to engage with the public and various stakeholders throughout the preparation phase. 

The institution will also set a limit on the amount of digital euros an individual can own, likely around 3,000 euros, to mitigate potential impacts on commercial banks.

The drive to create a digital euro coincides with a broader trend in the financial landscape. Electronic payments in the EU surged from €184.2 trillion in 2017 to €240 trillion in 2021, bolstered by COVID-19. 

Moreover, central banks representing almost a fifth of the world’s population are projected to launch their own digital currencies within the next three years, according to a survey by the Bank for International Settlements.