11 Q and A on the digital euro
Will the arrival of the digital euro mean the disappearance of cash, will it be a tool for greater control over citizens, and what are the European Central Bank’s tricks to encourage its introduction? From 11Onze, we offer answers to eleven fundamental questions about the digital euro.
Christine Lagarde, President of the European Central Bank (ECB), recently justified the need for a digital euro because of the “potentially disruptive transformation” that the payment model is undergoing due to the increase in digital transactions, the appearance of new digital assets and the entry of big techs into the payments market.
The rise of digital payments is illustrated by an ECB study, which indicates that the value of card payments (46 %) has already surpassed that of cash payments (42 %). And that is not counting other forms of payment such as mobile applications. Given this reality, Lagarde warned that money as we know it could lose its role as a monetary anchor, “threatening its key role in ensuring confidence in payments”.
Without this “public anchor”, the emergence of new types of digital assets, such as cryptocurrencies, could generate “instability and confusion among citizens about what is money and what is not”, according to the ECB president, who warned about the volatility of crypto-assets and the need to develop regulation.
In addition, Lagarde indicated that the entry of big techs into the payments market “could increase the risk of market dominance and dependence on foreign payment technologies”, arguing that “currently more than two thirds of card payment transactions in Europe are handled by companies based outside the European Union”.
In this context, the European Commission is expected to make a proposal on the legal framework for the digital euro later this semester. There are still many unknowns about the future currency, although the European Central Bank has already outlined what the broad outlines of its implementation should be. However, we should not forget that its success or failure will ultimately depend on the degree of adoption it achieves among the citizens of the euro area.
Will the digital euro replace cash?
No. The ECB has made it clear: the digital euro would be a complement to cash, not a substitute for it, so banknotes and coins will remain in circulation. The idea is that the digital euro will work in parallel to cash to meet the growing consumer demand for fast and secure digital payments. But its role goes beyond that. According to the ECB President, the digital euro will “ensure that money continues to be denominated in euro” and will strengthen “Europe’s autonomy”.
What is the timetable for its introduction?
A research phase for the project began in July 2021 and should be completed by October 2023. In parallel, the European Commission is due to draw up a proposal for a legal framework for the digital euro in the coming months. By the end of this year, the ECB should decide whether to move to the next phase, focusing on the development of integrated services. In this phase, which could last between one and three years, tests and possible real experiments with the digital euro would be carried out. Against this background, experts estimate that the digital euro could be operational in 2025 or 2026.
Will it be considered legal tender?
All indications are that it will. The ECB President has indicated that “it would be unprecedented to issue central bank money for retail payments without legal tender status just because it circulates electronically”. She added that “the digital euro can only function as a monetary anchor if it becomes a convenient digital medium of exchange that is part of the everyday life of Europeans”. In this respect, Lagarde pointed out that, to achieve sufficient network effects, the use of the digital euro should be extended not only to e-commerce and peer-to-peer payments but also to digital payments in physical shops, which accounted for 40 billion transactions in 2019.
Will there be parity between digital and physical euros?
Yes, in the words of Christine Lagarde, the digital euro will “safeguard citizens’ confidence that a euro is a euro by allowing them to convert private money into digital central bank money at parity”.
How much privacy will it offer?
Although 43% of Europeans rated privacy as the most relevant aspect of the digital euro, the ECB President has acknowledged that “the total anonymity offered by cash does not seem a viable option” for the digital euro. However, the European banking regulator indicates that the digital euro would allow payments to be made without sharing data with third parties unless this is necessary to prevent illicit activities. And it warns that for payments to remain private, different types of data would need to be protected, including the identity of the user, the details of each payment (e.g. the amount) and transaction metadata such as the IP address of the device used. In this respect, it is likely that there will be different degrees of privacy for different payments and that users will have to identify themselves the first time they access digital euro services. Lagarde specified that “at least an equal level of privacy should be provided as in current electronic payment solutions” and noted that it is being explored whether the digital euro “could replicate some features of cash and allow for greater privacy for low-value, low-risk payments, including offline payments”.
Will it be an alternative currency within the Eurosystem?
No. The digital euro would just be another way of paying in euros and would be convertible at parity with physical banknotes. The ECB insists that the aim is to respond to the growing preference of citizens and businesses for digital payments.
What advantages will it have over stablecoins and crypto-assets?
The digital euro will be supported by the ECB, which recalls that one of the tasks entrusted to central banks is to “maintain the value of money, regardless of its physical or digital form”. Although the high inflation of recent times calls into question their efficiency in fulfilling this mandate, it is clear that the ECB’s backing will guarantee greater stability than that exhibited by the highly volatile stablecoins and cryptoa-ssets. The European body warns that “the stability and reliability of stablecoins depend on the entity issuing them and the credibility and enforceability of its commitment to maintain their value over time”. It adds that where there is no recognised entity responsible for a crypto-asset, consumers cannot claim their rights. Moreover, the ECB warns of the risk of private issuers using personal data for commercial purposes.
What incentives will consumers have to use the digital euro?
The ECB ensures that the digital euro will be a digital means of payment that is as secure, easy to use and cheap as cash is today. The idea is that it will be free of charge for people using it for ordinary payments and that it can be used anywhere in the euro area. In a world where electronic payments are increasingly common, the digital euro would offer individuals and businesses an additional option to pay using central bank money. In addition, the digital euro could offer advanced features, such as automated payment functions or some form of digital identity.
Will there be limits on the conversion from physical to digital euros?
Probably. Options to prevent large amounts of digital euros from being held as a risk-free investment are being evaluated.
Will there be different levels of remuneration?
This is also quite possible. According to the ECB, if digital euro holdings were remunerated, the remuneration of the ordinary (i.e. “tier one”) retail payment leg would be zero or positive and thus never lower than that of cash. The European banking regulator considers that the remuneration of “level two” should be somewhat lower than that of assets considered safe. The aim would be to prevent the digital euro from becoming a form of investment.
Will it be based on blockchain technology?
This has not yet been decided. The Eurosystem is considering different approaches and technologies to create the digital euro. This includes centralised and decentralised solutions, such as blockchain, but no decision has yet been taken.
In a world marked by the payment revolution and the rise of crypto-assets, which are eroding the role of central banks and fiat currencies, the ECB aims for the digital euro to become “the best way to manage the transition to the digital age“.
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