New digital and mobile technologies are rapidly changing the way European citizens pay which is evident in the expanding use of, and preference for digital payment options as an alternative to cash.
Many central banks around the world are currently looking into offering their own virtual currency, known as central bank digital currencies, to ensure that consumers continue to have access to the safest form of money, central bank money, in a way that meets their needs in the digital age. In Europe, the European Central Bank has commenced work on creating a digital euro currency- an electronic form of central bank money accessible to all citizens and firms.
We have had a successful model for payments for many decades: central banks have provided the monetary base, in the form of central bank deposits for banks and cash for individuals – which is commonly referred to as “public money”. In turn, the private sector has offered its own payment solutions (for example, card payments), that are based on commercial bank money, such as deposits – this is often referred to as “private money”.
The stability of this hybrid model is contingent upon private money being backed by public money. That is, money offered by private intermediaries can be converted to public money on a one-to-one basis at any time. This guaranteed convertibility creates and maintains trust in both public and private money, as well as protecting the currency’s function as a single unit of account. In this way, public money underpins the whole payment system, by maintaining a well-functioning payment system and preserving financial stability and trust in the currency.
However, this robust and efficient hybrid model for payments is put to the test by the widespread adoption of digital payments. Proponents of the digital euro contend that if we are to preserve a stable and reliable payment system in Europe, we need to preserve the role of central bank money in the digital age.
At present, central bank money is available to the public only in the form of banknotes. Thus, in a digital world it could become marginalised as a means of payment. This digital euro would be like euro banknotes, but digital. It would be an electronic form of money, issued by the Eurosystem (the monetary authority of the eurozone), and would be accessible to all citizens and firms. The digital euro would be backed by the central bank, designed to meet the needs of citizens: it would be risk free and respect privacy and data protection. It is noteworthy that the digital euro would be convertible one-to-one with banknotes and the Eurosystem will continue to offer banknotes and support their usability as long as people demand them. It has been suggested that a digital euro would offer an electronic means of payment issued by the central bank that would be accessible to everyone throughout the eurozone. The EU has envisaged that a digital euro would complement cash rather than replace it.
The rationale behind the digital euro is that it would ensure that citizens can continue to trust in the monetary anchor behind their digital payments and would also preserve the role of central bank money as a stabilising force of the payments system. It would also protect the strategic autonomy of European payments and monetary sovereignty, providing a fall-back solution should geopolitical tensions intensify.
The apparent advantages to the introduction of a digital euro, include the following:
- A digital euro would help in scenarios where people stop using cash significantly, if other forms of electronic payment are unavailable, or if foreign digital money took over.
- A digital euro would provide an alternative to private digital currencies as well as a complement to cash
- For payees, a digital euro would provide an additional means to receive payments from their customers.
- The use of a digital euro would expand the availability of central bank money beyond its current use – for transactions between banks – to also include everyone’s daily payments.
- A digital euro would also help to avoid market dominance, improve the efficiency of the payment system and foster innovation in the private sector.
- A digital euro could also offer advanced functionalities, such as automated payment features or using some form of digital identity.
While the trend towards digital money is convenient for many of us and creates a wealth of opportunities for financial innovation and inclusion, the introduction of a digital currency also poses certain risks, including:
- If the use of cash keeps declining, public money could ultimately lose its role as the monetary anchor in Europe.
- Citizens’ trust that public money can always be converted to central bank money could be jeopardised, adversely affecting trust in the euro itself.
- The international role of the euro could be undermined, particularly if other large economies introduce central bank digital currencies that can be used across borders.
When endeavouring to introduce a digital euro, the Eurosystem will have to examine legal considerations, such as the legal basis for issuance of a digital euro, whether a digital euro can enjoy the status of legal tender, private law issues, cyber risk, the application of anti-money laundering and counter terrorist financing rules, privacy and data protection aspects. However, for the digital euro to ultimately be successful, it must be used in daily life by Europeans. As such, the design of the digital euro is of the utmost importance and must add value relative to existing solutions.
Central banks are charged with preserving the integrity of the monetary and payments systems in the interests of citizens. A digital euro, if carefully designed and introduced, could play a decisive and beneficial role in this endeavour, serving as a public good that would benefit the economy and support a well-integrated payments sector to respond to new payment needs in Europe.
The EU expects to complete the investigation phase of its digital euro project in the autumn of 2023 The Governing Council of the European Central Bank will then decide whether to move to the next phase, in which we would see the development of integrated services as well as testing and possible live experimentation of a digital euro. The European Central Bank has indicated that it is treating this matter as a priority, however the impact of a digital euro needs to be analysed carefully before taking any decision.