Digitalisation affects everything (or almost everything), hastened by the pandemic. One area unable to escape this accelerated trend is money, already partly digitalised, as cash starts to become obsolete. Two or three years ago, few were talking about the digital euro. Now the European Central Bank (ECB), or rather the Eurosystem working group, is planning to unveil it within five to seven years. It is still in the research phase. Many sectoral and technological problems remain, including cybersecurity measures capable of withstanding future quantum computing, among others. But come it will, and it is going to be more revolutionary than evolutionary, to borrow the terminology used by Fabio Panetta, member of the ECB’s Executive Board. Commercial banks know it and are on full alert, because this is going to be part of their reinvented future. The public have not yet caught on, but when they do, they will demand more than is currently on offer.
The digital euro will be akin to banknotes: a guarantee underwritten by the ECB, which is the strongest guarantee possible, because the Central Bank cannot go bust. It is sovereign money. It will have competitors, such as cryptocurrencies, which are not money, and above all the so-called stablecoins created by private companies. Facebook (Meta), with its 2.9 billion users worldwide, having announced the launch of the Libra, based on a basket of currencies, is redesigning its project under the name of Diem, with deposits backed by extremely solid reserves. A spokesperson for Meta has said that they could even have 100% of reserves in central banks. Other big tech firms are also making plans. The digital euro will be a monetary anchor, whether competing with them or working for them.
But the ECB is contemplating the possibility of limiting the amount that citizens can individually hold in digital euros –on their cards (if they still exist), on their mobiles, in their banks or in other forms not yet decided– to around €3,000-4,500 (the average monthly income in the majority of Eurozone countries), while allowing them to be used in a wide range of transactions. A clear goal of this limitation is to safeguard the banking system, already immersed in a profound process of transformation. Citizens will not accept this restriction if the possibility opens up –something that will be very hard to prevent– of being able to access public and digital sovereign money issued by central banks (in this case the ECB), also known as ‘reserves’. And this can be done in various ways. One is to have deposits at the central bank. There are others, such as tokens, which are not ‘deposits’, or doing it through intermediaries that distribute it (without creating it, like the current banks). But as things currently stand (exceptions are always possible) there are no plans for the ECB or other central banks to issue loans in their digital currency.
The digital euro is on its way. It forms part of the UE’s 2030 Digital Strategy, announced by the President of the European Commission, Ursula von der Leyen. But little is said of this at the Conference on the Future of Europe, which is due to culminate under the French Presidency next year. And yet it is of the utmost importance to the future of Europe.
The digital euro can be viewed as a medium of payment –like other digital media, including in Spain the hugely successful Bizum, owned by 23 banking operations (a good example of innovation)– or as a store of value. It will be difficult to halt its transformation into deposits, which will be underwritten not by states, as now (there is no Europe-wide guarantee of deposits, which some countries refuse to countenance) but by the sovereign ECB. This also applies to other digital currencies and other central banks, like the dollar, the Chinese yuan, sterling and the Swedish krona. These are known as CBDMs (central bank digital monies), between which there has to be interoperability –another of the major challenges– because one goal is to reduce the costs of international transactions.
Another element being pondered that the public –and businesses– will reject is the suggestion that it should be subject to negative interest rates, which would mean a new form of tax on their savings and income. The digital euro would require changes to the European treaties and national laws, taking it into the arena of political debate.
This is not the end of commercial banks, but their business will not focus so much on their customers’ deposits, and they will be forced to compete with other phenomena (cryptocurrencies, stablecoins, multiple investment funds, etc). As pointed out by Panetta, who took part in a debate at the Elcano Royal Institute in Madrid, the ECB does not plan to interact directly with hundreds or thousands or millions of users holding digital euros. In his opinion, financial intermediaries will be needed, in particular banks, but these will change direction and have more competitors. Banking intermediation, financial stability and the international financial system are three of the great challenges of the digital euro whose solution is by no means clear. The same applies to the preservation of its users’ privacy. There is also the need to ensure that, unlike cryptocurrencies, the digital euro does not generate more emissions of greenhouse gases through unrestrained consumption of electricity.
The transition will be complex, which is why it is important to proceed on a trial basis. Sweden has made a start, as have the Bahamas, while China, although running ahead of other currencies, lags slightly in order to trial it at the Winter Olympics in February. There is still much to do and little time to do it. But such is the way with revolutions.