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European Central Bank to investigate digital euro

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The European Central Bank (ECB) is launching a two-year investigation on whether to establish a digital version of the euro to be used alongside cash.

The central bank is proceeding with considerable caution as its counterparts around the world – such as the Federal Reserve and the Bank of England – weigh up how to manage the growing popularity of digital currencies, including volatile cryptocurrencies. A digital currency issued by a central bank would be distinct from cryptocurrencies like Bitcoin, Ethereum, and Dogecoin because they would be legal tender and usable for any transaction with a stable value.

A Bank for International Settlements survey showed that 86 per cent of central banks are researching the potential for digital currency, 60 per cent were experimenting with the technology and 14 per cent were deploying pilot projects. It explained that digital currencies issued by central banks could promote diversity in payment options, make cross-border payments faster and cheaper, and promote financial inclusion for those without bank accounts, as well as possibly facilitating fiscal stimulus transfers in times of economic crisis.

The ECB is launching the in-depth study after gathering input from citizens and financial experts. In a statement, the bank said that the digital euro must be able to meet the needs of consumers while helping preventing illegal activity such as money laundering. It said that it must not damage financial stability and monetary policy.

“[Digitisation] is reaching all areas of our lives,” said Fabio Panetta, a member of the ECB’s executive board. “The coronavirus pandemic has shown just how fast such change can happen. And this is affecting the way we pay. We are increasingly buying digitally and online.”

He said that there were many questions to be answered and that “a decision about whether or not to issue a digital euro will only come at a later stage”.

If the digital euro is given the greenlight after the two-year investigation, it will not be implemented for a further three years.

Panetta said that the digital euro would be more environmentally friendly than cryptocurrencies like Bitcoin as they would use less electricity.

“It has been nine months since we published our report on a digital euro. In that time, we have carried out further analysis, sought input from citizens and professionals, and conducted some experiments, with encouraging results. All of this has led us to decide to move up a gear and start the digital euro project”, says ECB President Christine Lagarde. “Our work aims to ensure that in the digital age citizens and firms continue to have access to the safest form of money, central bank money.”

Earlier this year, the UK government announced it would set up a new taskforce to explore the possibility of a national digital currency, among a series of possible reforms to boost the fintech sector.  

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