A digital euro: the European Central Bank picks up on accelerated digitalisation

, by Inés Flor García

A digital euro: the European Central Bank picks up on accelerated digitalisation
Kiefer / Flickr (CC BY-SA 2.0)

The European Central Bank (ECB) has launched a public consultation to decide whether to set in motion the ‘digital euro project’. Questions about the benefits, risks, and reasoning behind the project have arisen, most of which have been answered by Fabio Panetta, Member of the Executive Board of the ECB, at the ECON Committee of the European Parliament. A decision is expected in the middle of 2021.

Ubiquitous digital technologies are radically transforming the way people interact with each other and with the world around them. As stated by the ECB, digitalisation has deeply influenced the way people pay. For instance, one can now make payments with their watch. Other user-friendly payment methods include contactless-technology, mobile applications, and the use of cryptocurrency money oftentimes rendering cash obsolete. Facing the risk of an ever-changing financial system by the possible disuse and consequent disappearance of cash money, the guardian of the euro (ECB) adopts a forward-looking stance by advocating for a digital euro.

The purpose of launching a digital euro is to complement cash, rather than to replace it, thereby aiming to increase financial inclusion. A digital euro is, therefore, an anticipatory measure with the goal-oriented plan to “guarantee that citizens in the euro area can maintain free access to a simple, universally accepted, safe and trusted means of payment”, ECB argues.

At the moment, the ECB’s Governing Council is in a phase of listening, experimentation, and consultation, with the purpose of advancing work on the possible issuance of a digital euro for a digital age.

As to why the Euro-system might need an electronic form of central bank money now, Panetta abides by recent stats that point towards a shift away from cash payment practices, presently and in the future. The increasing use of digital payments stands in contrast with a drop of 6% in cash payments between the years 2016 and 2019. This trend is expected to continue and intensify in the following years, thus urging the ECB to safeguard the sovereignty of the European payment system to ensure efficiency in policy measures.

Hence, it is of paramount significance to anticipate the benefits and risks that introducing a digital euro in the Euro-system could bring. Some of the benefits outlined by the ECB directly respond to our current pandemic context. A virtual payment system could potentially cushion the effects of extreme events, such as natural disasters and pandemics, in the face of failing traditional methods. On a different note, the digitalisation of the euro would facilitate payment transactions for people that rarely use cash.

An implied risk, however, revolves around the question of trust. The ECB has secured people’s trust in the euro currency since its introduction in 1999. In his speech, Panetta explains that making a payment is but a social procedure rather than solely an act of exchanging money for goods and services. Money is, in fact, “the most universal and most efficient system of mutual trust ever devised” curtailing payment interactions into social ones. In other words, the ECB is an institution built on social and interactional trust – a value forged through efficiency, security, and consistency.

Losing the trust of its European citizens would devalue both the euro currency and the entity’s reputation, an endeavor the ECB is most certainly trying to avoid at all costs. As a result, the custodian character of the ECB would extend from banknotes to digital forms. In what seems an attempt to reduce public speculation about the digital euro issue, the ECB sharpens the differences between crypto-assents and a digital euro. According to them, ‘crypto-assents are fundamentally different from central bank money’ based on the grounds that crypto-assets’ price volatility is the result of the lack of intrinsic value and institutional support. The goal here is to enable a second (not secondary) and electronic form of central bank money – a digital equivalent of physical banknotes, claims Panetta. In doing so, daily payments would get faster and the monetary system more accessible and democratic.

Overall, the digital euro project presents itself as an effort to improve the European citizen’s quality of life by adapting to and anticipating their digital needs. To be successful, the ECB’s is dependent on strong public support and trust. As previously signalled, without the people’s confidence in the digital euro, it would inevitably plunge. Considering that the project is at its starting point, we must await further reports on its viability and implementation particulars.

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