It’s Wednesday afternoon, you've spent the whole day in the library, and the only thing you want is to go home. But wait, you have nothing in your fridge despite an almost empty bottle of oat milk. So there is no way around it, you have to get groceries. So, you drag yourself to the closest supermarket, get everything you need, and speed run to the only open self-checkout station. This notion has become so unconscious in most students’ minds. It’s just too simple, scan your items as fast as you can and hold your card against the dataphone, and you’re done. I would even go so far as to claim that most students in Maastricht don’t even carry enough cash in their wallets to be able to pay for their groceries. Then, if no one uses it, is there even a need for cash anymore? According to the Bank for International Settlements, 9 out of 10 existing central banks have reported that they have launched studies inspecting the objectives and design of their own digital currency. One of these institutions in question is the European Central Bank (hereinafter ECB), which is currently investigating whether introducing a ‘digital euro’ would benefit society in the euro region.
Currently, more than 346 million Europeans pay in euros with banknotes, and coins but also digitally. What most people aren’t aware of in their daily life, is that the 50 euro banknote you use to pay in a bookstore is not the same as the 50 euros you would pay on Amazon. One is central bank money or public money, whereas the other is private money. When you get a new loan from a commercial bank, that would also be private money because the money was created by your bank and not issued by a public institution like the ECB. Every time you withdraw cash from your bank account your private money gets converted into public central bank money. That’s where the digital euro would come in place to bridge the gap as public money in electronic form.
The ECB intends to offer the digital euro as another means of digital payment that would not replace banknotes, at least not in the beginning, but complement cash. Yet, paying by card or via an app is no news, so what is the difference between the euro we can use digitally now and the actual digital euro? Currently, the central bank gives cash to banks for consumers and the private sector (e.g., PayPal or Klarna) provides their customers with payment solutions tied to commercial money. The biggest private companies, whose headquarters are mostly outside Europe, currently provide those solutions. Thereby, these companies have a great influence on our local payments market. As a result, public money could lose its monetary anchor in Europe. If the European payment market becomes dominated by large non-European tech companies, the risk of market-abusive behavior, unregulated payment solutions, and cybercrime would drastically increase.
In such a potential hybrid system, where both currency kinds would coexist, multiple benefits would arise. Firstly, digital payments aligned with ECB money would increase the integrity of the eurozone’s financial system. Thereby, the reliability and stability of the euro would increase and through the digital euro, the international use of the currency could rise. Moreover, the digital euro could provide a secure payment opportunity for unbanked or underbanked citizens. According to the World Bank around 12% of adults in Greece do not have access to traditional banking services, 7.5% in Italy, and 5.6% in Portugal. The percentage of underbanked individuals is believed to be even higher. The ECB intends to create the digital euro in such a way that the currency would also be accessible to individuals that do not have a bank account. They would still be able to receive payments, pay bills and access their money via a smartphone app. Without the need to convert public money to private money, users wouldn’t need to rely on their banking partner to process a payment. Digital euro payments could reduce the risk of delayed payments and thereby increase the efficiency of cross-border payments. Moreover, fees charged by banks and other intermediaries between transnational payments reduce the cost of trading partners. Overall, the main goals of the digital euro range from increased convenience and security of consumer payments, to the creation of an easily accessible currency for everyone.
But obviously, such a system has not been automatically loved by all. As well as questions about the possible needs and benefits of such a technology, discussions about the digital euro have also sparked critiques and concerns about such an endeavor.
Firstly, the design of the digital euro will most likely give users direct access and the euro system would work without the need for a middleman, thereby making the services of public banks mostly redundant. The central bank would provide basic services related to payment transactions for free and privately owned banks would no longer be able to compete. Aware of such possible repercussions/flaws, the ECB addresses this issue by disabling the ability to make programmed regular payments via their platform. Banks would still be needed for payments like rent and other conditional advanced payments. The resulting need to use multiple payment platforms makes room for confusion, which is feared to increase the risk of money laundering and tax evasion due to monitoring issues. However, those issues would need to be resolved by changes in the EU legislative framework. People fear that the monitoring framework needed to provide secure transactions and reduce illicit activities would violate users’ privacy rights. The digital euro will need to be traceable to enable monitoring by the ECB, so unlike cash, transactions would not be anonymous. As cyber-attacks and cybercrime have increased in Europe in the past couple of years, a digital euro could be at risk of cyber-attacks, such as hacking, malware, and phishing. Especially in the early stages of implementation, such new technology is vulnerable to being raided. Lastly, the wide acceptance of digital currency might render the production of physical banknotes obsolete. In case of technological failure and disruption, society would be too dependent on digital infrastructures and the financial system could collapse.
Despite its concerns, the global financial market is headed toward digital currencies. The first country to launch a digital currency was the Bahamas, which launched the Sand Dollar in 2020, China followed suit and launched a pilot program for a digital Yuan in 2020 and India expects to launch a digital Rupee this year. The ECB is working hard on designing the currency to limit the adverse effects that could follow the implementation. Looking at the timeline of the digital euro, the ECB plans on preparing an actual decision-making document about the currency design and implementation and potentially launching the realization phase of the project in the autumn of this year. After all, consumer satisfaction comes down to the tradeoff between potential benefits and adversities. Only time will tell if the digital euro will be a valuable or even favorable addition to our everyday lives. Returning to the supermarket counter, the digital euro would not change that much about the experience of paying for your groceries. You could use your phone to pay for your groceries if you wanted to but could also use your usual payment method, and within a couple of minutes, you would be at home preparing yourself a well-deserved dinner!
This article was written for the MD x EuroMUN Printed Edition.