The European Central Bank (ECB) has taken its next steps towards the creation of a digital euro, announcing that it would move on to ‘the preparation phase’ of its potential implementation on 1 November.

The ECB on Thursday said that the decision follows the completion of the investigation phase launched by the Eurosystem in October 2021 to explore possible design and distribution models for a digital euro. In a report published on the same day, the ECB said that it has designed a digital euro that would be widely accessible to citizens and businesses through distribution by supervised intermediaries, such as banks.

The two-year 'preparation phase' will see the ECB finalise rules, choose private-sector partners, and carry out testing and experimentation to develop a digital euro that meets both the Eurosystem’s requirements and user needs.

A digital euro would be distributed by the ECB, commercial banks and digital wallet providers. It would only be available to residents of the euro area and its citizens abroad.

While a number of smaller economies such as Barbados and Nigeria have already launched digital currencies, the traditionally larger western economies like the UK and Canada have been more conservative with their approach to central bank digital currencies (CBDCs). Should the ECB succeed in its implementation of a digital euro, it could create the framework for other central banks of G7 wealthy nations to follow.

In its announcement, the ECB stressed that the launch of the preparation phase is not a decision whether to issue a digital euro, adding that this decision will only be considered by the Governing Council once the European Union’s legislative process has been completed.

Commenting on the news, ECB president Christine Lagarde 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.”

Fabio Panetta, ECB executive board member and chair of the High-Level Task Force on a digital euro, added that “A digital euro would increase the efficiency of European payments and contribute to Europe’s strategic autonomy.”

While CBDCs have enthusiastic momentum behind them, critics have argued that it is unclear what value they add versus traditional fiat currency. One of the major concerns is that a digital currency may facilitate a run on commercial banks, but the ECB said it would set a cap on how many digital euros any individual may own in an effort to address this issue.

The International Monetary Fund (IMD) has recently published a 'how to' guide for central banks on digital currencies, in which it notes that CBDCs should have a modest impact on monetary policy outside of crisis times.

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