The European Central Bank (ECB) is currently considering the implementation of a digital euro, which would provide people with a public digital alternative to private bank deposits. Positive Money Europe supports the idea of a digital euro that is easily accessible, free of charge, and prioritizes privacy. It should be noted that the digital euro would be distinct from physical cash, such as banknotes and coins.
Currently, individuals have limited options when it comes to saving money, receiving salaries, and making daily payments, as they primarily rely on commercial banks. The funds in our bank accounts exist as virtual currency and represent a debt owed by the bank to its customers.
In contrast to private bank-created money, public money issued by central banks is inherently stable. Physical cash, like banknotes and coins, is the only form of public money that is accessible to everyone, including those without bank accounts. The ECB, along with other central banks around the world, is exploring the possibility of introducing a digital version of public money called the digital euro.
The rise of digital cryptocurrencies, such as Bitcoin, and the underlying distributed ledger technology (DLT) have prompted central banks worldwide to explore the digitization of their monetary systems and the introduction of central bank digital currencies (CBDCs). The Bank of England began investigating the launch of its own CBDC as early as 2014.
DLTs, including blockchain technology, are often seen as the technological foundation for digitizing the monetary system and adopting CBDCs in public discussions. They enable seamless asset transfer and settlement on integrated platforms, making a strong case for their use.
The digital euro is one such project, and it is indeed built on blockchain technology. Its goal is to provide European citizens with easy access to a straightforward, widely accepted, secure, and trustworthy means of payment in today’s digital age.
Central banks, such as the European Central Bank, are responsible for creating physical money. However, it’s important to note that the central bank does not create the money that individuals have in their bank accounts. If a bank faces financial difficulties, there is a risk of losing the funds in one’s account. To mitigate this risk, countries like the Netherlands have implemented deposit guarantee schemes to protect a portion or all of an individual’s funds.
Over the past decade, electronic payments have become increasingly popular, leading the ECB and other central banks to explore the introduction of a digital currency in electronic format, known as the digital euro. The digital euro would still be a euro, similar to physical euro coins and notes, but it would be a digital currency issued by the Eurosystem, which consists of the European Central Bank and national central banks. It would be accessible to all citizens and businesses and is intended to complement physical cash, not replace it.
When considering the development of the digital euro, it’s important to think about both current payment methods and how they might evolve in the future. If the central bank only offers physical cash while more and more people prefer digital payments, and the only digital money available is privately issued, there is a risk that central bank money could lose its crucial role in payments. This could destabilize the entire monetary and financial sector.
There is also the possibility that non-European digital payment solutions and technologies operated by foreign entities could dominate the payment landscape, as we have seen with card payments and online transactions. This risk is compounded by the expansion of payment options by tech giants, who have a vast customer base. This raises concerns about autonomy, privacy, and European sovereignty.
Furthermore, there is a potential for the rise of central bank digital currencies (CBDCs) in major economies globally. These CBDCs offer efficiency, scalability, liquidity, and security advantages, making them attractive on the international stage. They could also facilitate cross-border payments, further enhancing their role as a global payment standard. Failing to introduce a digital euro could jeopardize the euro’s international influence and pose additional sovereignty risks.
While these scenarios may not be imminent, they could become realities if action is not taken now. Taking action could provide increasing clarity regarding digital money, especially crypto-assets. Unbacked crypto-assets lack stability and scalability, resulting in slow and costly transactions, and some even have environmental and societal drawbacks.
Stablecoins, on the other hand, are susceptible to runs, as seen with algorithmic stablecoins. To address this, it is crucial to close regulatory gaps in the crypto-asset ecosystem. Institutions like Parliament play a vital role in establishing a robust regulatory framework.
To prevent confusion surrounding digital money, the central bank must offer its digital currency. This would meet the growing demand for digitalization and provide a stable foundation in the evolving world of digital finance.
The concept of a digital euro is a significant topic within the Eurogroup’s agenda. In July 2021, the Eurogroup initiated discussions on the implications of a digital euro, guided by insights from the ECB and the Commission. These discussions focus on policy objectives and the global context, privacy considerations, the impact on the financial system and cash usage, and the broader digital euro ecosystem.
The Eurogroup released its initial statement on the digital euro project in February 2022, emphasizing its importance as a European initiative rooted in democratic principles and supported by the European public. In January 2023, the Eurogroup issued a further statement highlighting the potential of the digital euro to enhance the digitalized economy, promote financial innovation, and bring advantages to citizens, businesses, and member states. The key principles endorsed by the Eurogroup include complementing physical cash, ensuring safety, resilience, user-friendliness, and accessibility, balancing privacy with compliance, incorporating an offline function for financial inclusion, safeguarding financial stability, encouraging innovation while avoiding programmable money, and fostering interoperability with other CBDCs.
The Eurogroup will closely monitor the ECB’s retail digital euro project advancements, separate from legislative negotiations under the Council Presidency’s responsibility.
A blockchain-based euro offers several advantages. It enables programmability and automation through smart contracts and peer-to-peer payments, even among machines, without the volatility associated with other cryptocurrencies. It provides resistance to manipulation as transactions are recorded simultaneously on multiple computers, making it difficult to falsify or tamper with transaction data. It enhances security as transaction data is distributed across a vast network of computers, reducing the risk of hacking attempts. It also offers efficiency gains by streamlining payments and eliminating the need for intermediaries, reducing transaction costs and accelerating processing. Lastly, it has the potential to promote financial inclusion by providing easier access to financial services in regions with limited banking infrastructure.
Ensuring that everyone in the euro area can easily use public money for digital retail payments is crucial for maintaining a stable financial system and creating a more efficient monetary and payment system in Europe. A digital euro would strengthen the strategic independence and resilience of the euro retail payments market, safeguarding against potential disruptions due to geopolitical risks. It also supports the growth of European-controlled payment services and fosters a robust ecosystem for euro retail payments. Private and public entities must collaborate to create a pan-European digital payment solution, similar to the introduction of euro banknotes and coins.
The concept of a euro stablecoin involves tokenizing traditional fiat money held in banks or other financial institutions to create digital assets known as stablecoins. These stablecoins utilize DLT to facilitate transfers of euros between individuals. It’s important to note that stablecoins must be fully backed by money or assets in the issuer’s account to ensure their stability. There are two types of stablecoins based on the existing two-tier structure of the monetary system: fiat-backed stablecoins backed by commercial or central bank money. While both types are denominated in euros, there are differences in terms of deposit guarantee protection and the backing of funds.
In conclusion, the world of digital finance is rapidly evolving, and the concept of a digital euro and the rise of stablecoins based on DLT play significant roles in reshaping the monetary landscape. A blockchain-based euro offers numerous advantages, such as programmability, security, resistance to manipulation, and efficiency gains. The Eurogroup’s active involvement in developing a digital euro demonstrates its commitment to a resilient and efficient monetary and payment system in Europe. Collaboration between public and private entities is crucial for successful implementation, and maintaining a strong regulatory framework is essential. Embracing these innovations while addressing regulatory gaps, promoting financial inclusion, and safeguarding privacy will be key in maximizing their benefits.
