Plans for a European public cryptocurrency have begun emerging after social media giant Facebook announced in June its blueprint for Libra, a private digital currency, which spooked regulators who have since raised concerns and said Facebook's project could be banned.
Facebook's move highlighted the fragmented payment landscape in the European Union, where U.S. card firms dominate plastic payments and no common system has emerged to lower costs for fast transactions across the 28 countries of the bloc.
"If industry efforts fall short of developing an innovative and efficient pan-European payment solution, the social need for it could potentially be met by issuing a central bank digital currency," said the document, seen by Reuters.
The paper will be discussed on Thursday by EU finance ministers who are expected to adopt a joint statement welcoming the ECB's work on a possible digital currency, a draft seen by Reuters says.
An ECB-backed project for real-time payments in the euro zone, known as TIPS, was launched last year, but has so far been met with caution by banks.
A public cryptocurrency would represent an alternative to Libra and other private projects, and could reduce costs of international transactions, which the ECB sees as too high.
Private currencies also have the potential of reducing the usage of cash, as consumers could rely on cheaper and more efficient digital means for payments.
The ECB does not yet see an impact on cash itself, as it remains a very popular means of payment in Europe.
But "signs of a future decline in cash usage could be a catalyst in accelerating central bank efforts in the area of central bank digital currency", the ECB document says.
An ECB-backed digital currency would have "far-reaching implications" for the financial system.
It could alter the way monetary policy is conducted and transmitted, and also affect the banking sector, credit intermediation and bank funding, the paper notes.
Its fallout needs to be "carefully assessed" and its features would need to be further analysed, the document said.
Under the most ambitious plan, users of the public digital coin could open bank accounts directly at the ECB. That would cut transaction costs but would make existing banks and payment services largely redundant, an ECB official said.
Under a less radical option, banks could be given electronic cash or tokens by the ECB which they could then distribute to their clients, the official said.
The ECB document says work will continue on the matter "to be ready to act should the need arise in the future".
(Reporting by Francesco Guarascio @fraguarascio; Editing by Hugh Lawson/Mark Heinrich)
By Francesco Guarascio