The digital euro as paperless cash

It’s good that the ECB is working on a digital currency. But the pace is currently not enough. A guest post.

Just a matter of time: the digital euro will come in one form or another.

Dhe public discussion about a “digital euro” continues. Federal Finance Minister Olaf Scholz recently declared that he supported the efforts of the European Central Bank (ECB) to introduce a digital euro. According to ECB President Christine Lagarde, the euro should therefore also be “equipped for the digital age” and be introduced on a digital basis if this becomes necessary. The discussion about the introduction of digital central bank money has also come into focus because others are already much further ahead than the EU when it comes to implementing digital payment models. For example, the mega-corporation Facebook is pushing its own digital currency Libra – now renamed Diem – onto the market.

China is certainly generating another major drive for the introduction of a digital euro. The country is just about to win the race for the first digital national currency against the EU and the United States. The E-Yuan is already in a pronounced test phase there. The Chinese central bank is putting the EU and the United States under pressure by implementing a “digital Chinese currency”. In Shenzhen, Suzhou, Xiong’an and Chengdu, apps are already being tested that can be used to pay in “e-yuan”. An expansion of this new payment infrastructure to other Asian and African countries has already been discussed.

The ECB has to react to this and wants to make a decision as early as mid-2021 as to whether it will deal more closely with the digital euro. A public consultation was carried out to find out whether a digital euro is generally desired and which requirements it should meet. While digital currency systems are already being developed and tested to a considerable extent in China, the EU is still largely in the process of forming an opinion.

Tech companies as competition

The discussion about the digital euro is becoming increasingly confusing. In order to grasp the topic, however, it is necessary to consider it on different levels. To do this, one must first understand how our euro monetary system works. The ECB has the monopoly on issuing central bank money: only it can issue physical banknotes and coins or make money available in electronic form in central bank accounts of banks and other financial institutions. For private customers and the rest of the economy, however, the “electronic ECB money” is not directly available.

Similar to today’s cash, an electronic form of central bank money could now be used as the digital euro. With the introduction of a digital euro, every bank customer could have the option of exchanging their credit balances with a commercial bank for digital central bank money. The digital euro could then be used directly by citizens and companies and would therefore initially complement our cash.

So when central banks think about the digital euro, they mostly mean a digital form of the euro for private individuals – comparable to today’s paper- or metal-based cash. Because digital central bank money is safe and payments via smartphone or PC are (more) convenient, there will be no paper bills and metal coins in the digital world of the day after tomorrow anyway.

Many payment processes are already digital nowadays: online banking, credit card payments, Apple Pay, Google Pay, PayPal – all of these payment methods have one thing in common: They are electronic and do not require physical cash. Anyone who prefers to pay digitally today, i.e. without cash, can do so conveniently almost anywhere.

Sovereign infrastructure

For EU citizens, the benefit of an e-euro lies initially in the increased convenience of their payment processes. From the point of view of the monetary authorities, however, there are many advantages over other electronic means of payment: If the ECB digitizes cash itself, it could create a sovereign digital payment infrastructure. In view of the mentioned initiatives for the introduction of private stablecoins on a dollar basis, for example by Diem or the aforementioned digital payment systems of tech companies, there is concern that, among many other fields, payment transactions are now largely carried out by tech companies is taken over.