What would the digital euro be?
The digital euro would be a ‘central bank digital currency’ issued by the European Central Bank and available to the general public. It would be exactly like cash, just in a digital version. Like cash, each digital euro held by consumers would be directly backed by the European Central Bank. It would be distributed to citizens and businesses by banks and other payment service providers.
Unlike crypto-assets, the digital euro would be central bank money. The European Central Bank would guarantee that it is safe, that it keeps a stable value, and that it can be exchanged at face value for euro cash. By contrast, crypto-assets can fluctuate significantly in value and their exchange into euro cash or even commercial bank money cannot be guaranteed.
Why do we need a digital euro?
The euro has been a symbol of Europe’s unity and strength since its inception 25 years ago. While cash is still prevalent and will remain widely accessible and accepted, more and more citizens and businesses choose to pay electronically. In this context, the digital euro has several objectives:
- To ensure that people, businesses and public entities continue to have access to a public form of digital money for payments, which is accessible and accepted everywhere in the euro area, at any time (as opposed to only relying on private solutions);
- To make available a form of digital money which ensures the same level of privacy as cash (unlike existing digital payments solutions) and is accessible to all citizens, including those without bank accounts;
- To promote innovation and competition in retail payments, including by enabling banks and other payment providers to develop new solutions for their customers;
- To support Europe’s open strategic autonomy and reinforce the international role of the euro.
Many central banks around the world are currently exploring the issuance of central bank digital currencies, and a growing number of countries have already issued such currencies.
Stablecoins and other crypto-assets that are not denominated in euro, if widely used for payments, could also undermine the stability of our monetary system. It is therefore important to establish a digital form of the euro to ensure that people, businesses, and public entities continue to have access to a public form of money in euro which is accessible and accepted everywhere in the euro area and at any time. The digital euro would also make it easier for people to pay throughout the euro area. It would bring a cash-like experience to digital payments by allowing users to pay and transfer money with a high degree of privacy, and unlike many other digital payment solutions, even without an internet connection.
If it has privacy like cash and the convenience of digital transactions over the internet the digital euro would be the perfect currency for organized crime. 500€ notes have been taken out of circulation because with those it was way to easy to transfer very large sums conveniently and privately.
Unfortunately, I don’t think all mentioned points will become a reality, unless it were somehow possible to limit the amount of money transfered and to make money transfers local only. Both are hard to impossible, depending on the exact implementation of an offline-capable “digital euro”.
At the moment the idea that I have understood reading the various documents and interviews is that the digital euro wallets will not be a sort of bank account managed by the ECB, but they will be managed by the private banks (with similar guarantees for banking inclusion as existing bank accounts) and will be interoperable in order to use the common ECB-backed digital euro.
Therefore you still have the banks managing the infrastructure; also to convince the banks to adhere and not to completely destroy the existing electronic payment circuits there is a proposal to have a limit on the maximum transaction amount.
Would make sense if that’s how they are envisioning it. But then I don’t see how it changes the status quo. Bank accounts are still bank accounts and using digital money as a regular person is not different in any meaningful way. It feels a bit… pointless, you know? But I haven’t read too much about it, so maybe I am just uninformed and am totally missing the point here.
Yes, bank accounts are still (only) bank accounts, which they have been for centuries with only cash (coins or banknotes) and paper-based accounting. Isn’t this the point? If the digital euro is to be a digital analogue for cash, surely one would expect it to play the same role as cash, which isn’t the form to store your entire wealth and belonging, but to serve as an easily tradeable and transportable form of money. The ECB doesn’t want to provide and manage bank accounts, or rather no central bank does as it’s simply not what banking has always been, it’s always been a private endeavour.
I think the digital convenience of “anonymous” payments is real, and also that the ECB wanting to implement the digital euro as an online e-commerce compatible system from the beginning, directly challenging various different payment circuits with a single universal one, is also a significant development.
I think that much like with regular SEPA transactions, there will be a defined maximum amount above which transactions are subject to extra scrutiny. I’d be interested whether this means that transactions above a certain amount would automatically have fewer privacy features enabled.
Such a limitation is only really enforcable with transactions being carried out by a central authority, an antithesis to the whole “cash, but digital” idea. There is no one stopping you from handing someone a billion euros in cash to someone else without a record of it. The only downside of such a direct transaction is that people have to meet face to face, count the money, be able to defend their giant pile of cash and trust the other person to a certain degree.
If it’s all digital, there will probably always be a way to link up to someone over the net and make the digital euro system think you are close to one another.
I don’t think the idea of “digital currency backed by a central bank” can work without a central authority anyway.
I also don’t think much will change in terms of how trust is handled in the financial system. I find that a little scary: Trust always comes from the system only, often relies on commercial certifications rather than strong cryptography and is not enforceable by individuals. E.g. card terminals are certified and thus regarded as trusted. But there’s nothing I could do from my end to make sure my transaction via a random card terminal is safe/goes where it needs to go/is the right amount/…