The arrival of a central bank-issued digital currency is a matter of when, not if. so it has seemed to me for the past couple of years, for one simple reason. there is a first-mover advantage for countries that pioneer official e-money, first because it contributes to an environment in which local businesses can invent related financial technology that piggybacks on to a digital payment system and, second, because users are likely to adopt more convenient payments solutions as soon as they are available (for international payments in particular). no central bank would want to be seen as a drag on fintech competitiveness or witness its constituents opt for alternative currencies en masse.

Now the european central bank has shown its hand, too. as my colleague martin arnold reported last friday, the euros central bank has released a detailed report and is launching consultations on a digital euro. the report sets out how a digital euro may be designed, scenarios in which it would be useful to have one and a long list of requirements to address potential downsides.

The bank itself says it is a matter of if not when. but it is an if of some urgency. when i spoke to fabio panetta, an ecb executive board member and author of the report, he explained the central banks intention was to be ready to provide a digital currency if and as soon as the people of the eurozone decided they wanted one.

We have been observing a decline in demand for cash as means of payments, he told me, with the pandemic also encouraging more use of digital payments. cash is still the most important but these processes are highly nonlinear you have to look ahead of you and be ready if the process would have been unwise not to be ready to do as much as possible to provide as quickly as possible a [digital] means of payment by the central bank in case people ask for such services.

That does not mean the ecb is calling for such a currency today. but reading the report, it is hard to resist the thought that the euros central bankers have come round to thinking it would be a good idea. the report makes explicit references to the central banks legal duty to ensure that payments systems work smoothly and to support the general economic policies in the union, including promoting the international role of the euro.

The primary motivation is not that others are ahead, said panetta, but that we observe a shift in preferences towards digital means of payments. still, the first-mover advantage seems to weigh on minds in frankfurt. there is a clear dimension of sovereignty in having your own currency used by people in your own jurisdiction.

He pointed to one possible scenario set out in the report: a digital currency issued by a foreign central bank becomes a means of payment that people want to use because they dont want to walk around with paper in their pocket. if were not ready to provide that instrument, you can imagine the scenario where they shift to a different one. and that could weaken your sovereignty, said panetta, citing research by ecb analysts which concluded: that a cbdc [central bank digital currency] increases asymmetries in the international monetary system by reducing monetary policy autonomy in foreign economies, but not domestically, suggests that introducing a cbdc sooner rather than later could give rise to a significant first-mover advantage.

As for fintech innovation, the report does not mention self-executing or smart contracts, where payments can be automated if specified conditions are met. last year the association of german banks publicly called for a digital euro design that would help the development of such innovations. the ecb seems to have listened, however, for the report does say a digital euro must offer the best available technology to meet the markets need for programmability. in panettas words, a digital euro would be an instrument that naturally lends itself to smart contracts. you cant do that with a banknote i never saw a very smart piece of paper.

The ecb is clearly preparing a huge didactic effort. the report is set out with a series of possible scenarios to start a debate on the risks and rewards of issuing an ecb-backed digital euro accessible to all, and includes a number of requirements that such a currency would have to satisfy to alleviate concerns. for example, the ecb is adamant a digital euro would not replace cash but exist in parallel with it.

That didactic approach will be good for high-quality public debate. but it also means the ecb comes to the debate amply armed with answers to the objections that may arise.

For example, panetta and ulrich bindseil, an ecb director-general, published a personal side proposal a few days after the official report for a particular design of a market-friendly digital currency one without quantitative constraints on access. to regulate the supply and demand for such a digital euro, they proposed a tiered interest rate on digital euros. individuals would be guaranteed a zero or higher rate on balances used for regular payment needs, for example set at the average households net monthly income of 3,000. for these sorts of regular transaction needs, the digital euro would always be at least as advantageous as cash. for balances above this level, the rate could track the ecbs policy rate even into negative territory, so as not to undermine private banks deposit-taking business model.

Even if the ecb is not now committed to a digital euro, it is firmly behind the goal of being able to issue a digital euro in the future. that, and the evidently serious preparation for the public debate, makes me think that an official digital euro will soon be a reality. how soon? after six months of consultation and initial technical experimentation, the ecbs governing council will decide on an investigation phase that could take about a year and a half, then take another decision on whether to actually develop a digital euro, which could take another couple of years depending on the chosen design. so let me stick my neck out and predict an official digital euro will come to an e-wallet near you by the end of 2025. you heard it here first.