Just as the internet revolutionized the way we communicate, technology is radically challenging the way money could work in the future. Policymakers will soon have to make decisions on how to make the best out of those technologies. By introducing a public digital euro, the European Central Bank could provide a safer and more efficient alternative to bank money and cryptocurrencies.
The European Central Bank said Friday it will decide whether to pursue or abandon plans to issue a digital euro toward mid-2021.
Releasing a report setting out the time schedule, the Frankfurt-based institution kickstarted a phase of experiments to consider the merits of minting central bank digital currency (CBDC).
Unlike bitcoin, whose value is based on demand and can become worthless overnight, the digital euro would be equivalent to an electronic banknote backed by the ECB. People would be able to pay and exchange digital euros like they would normal currency.
The move comes as Facebook and 26 other companies prepare to launch a payment service this fall called Libra, which would be available to the social media giant’s 2.7 billion users.
“Our role is to secure trust in money,” ECB President Christine Lagarde said in a statement. “This means making sure the euro is fit for the digital age. We should be prepared to issue a digital euro, should the need arise.”
The report lays out the pros and cons of a digital euro and forms the basis for an ECB consultation, starting from October 12, that will run in parallel to the in-house experiments. Eurozone central bankers will next year use both workstreams to consider the ECB’s next steps.
Right now, people have little choice but to use private banks, aside from hoarding cash under a mattress. Few people are aware that the money in their bank accounts exist only as money on a computer screen, and is legally the property of their bank. The bank owes that money to people, but the money does not belong to them.
By contrast, physical cash (banknotes and coins) is the only form of money that is actually created by national central banks and that is not attached to a particular debt from a bank to individuals. When the central bank issues cash, this also creates an income for governments – known as seigniorage. In addition, cash is the only payment system that is entirely free of charge, and accessible to everyone, including those who don’t have a bank account. In fact, coins and banknotes are a valuable public utility service.
Why does the future of cash matter?
From contactless cards to mobile apps and cryptocurrencies, today’s digital technology is everywhere and enables us to make user-friendly payments. With the increase in financial technology, there is a risk that cash will disappear. If that happens, this would mean that the entire money and payment system would be left in the hands of a few increasingly powerful private financial companies. We would leave those companies with even more power to monitor what we pay for and who we exchange with.
Not to mention, without the ability to withdraw cash, there is no way to opt out from the current banking system. Money is a public good. Technology can allow us to redesign our monetary system so it works in the public interest.
Public digital currency – Making the euro citizen-friendly
Positive Money Europe advocates for the introduction of a public digital currency system in the Eurozone. With such a system, the ECB would essentially allow citizens to store their money at the central bank and make all sorts of basic payments and transactions with it. In essence, a public digital currency has the same properties as cash (free of charge and non-debt based) on a digital format.
The digital euro would not replace physical cash, and we believe your ability to use notes and coins should be protected.
The digital euro system would interact with the privately run banking system, meaning that people could move their money out of their commercial bank accounts to their digital euro account and vice-versa. A “digital cash” system would remove a need for the Government to bail out “too big to fail” banks, because money stored at the central bank would be risk-free. This system could make deposit insurance schemes less necessary.
Public digital currencies would remove the banking system’s privileged access to central bank money. By allowing people to use central bank money as well, it would reduce the concentration of economic power in a few large institutions. Because people would have more freedom with their money and less implicit public subsidies, it would force the banking system to be more ethically responsible and competitive.
Cyberattacks, natural disasters and pandemics are flagged as potential risks because they can lead to outages of private card payment schemes, online banking and cash withdrawals from automated teller machines (ATMs) that could “significantly affect retail payments trust in the financial system in general”.
The digital euro would thus provide a “possible contingency mechanism for electronic payments that could remain in use even when private resolutions are not available,” the report notes.
But the ECB also flagged that it could have a negative impact on financial stability.
“The euro belongs to Europeans and our mission is to be its guardian,” said ECB President Christine Lagarde.
“Europeans are increasingly turning to digital in the ways in the ways they spend, save and invest. Our role is to secure trust in money. This means making sure the euro is fit for the digital age. We should be prepared to issue a digital euro, should the need arise,” she added.
According to the central bank, some 79 per cent of all euro area payments at points of sale are still cash transactions, amounting to more than half of the total value of all payments.
The ECB aims to decide whether it should proceed with creating the digital euro by mid-2021.
Yves Mersch, a member of the executive board of the ECB, has backed the creation of a digital euro stressing earlier this year that money is a public good and that “it can only inspire trust and fulfil its key socioeconomic functions if it is backed by an independent but accountable public institution which itself enjoys public trust and is not faced with the inevitable conflicts of interests of private institutions.”
He described Libra, Facebook’s planned digital currency which is to be overseen by a 28-member organisation and backed by reserves of real-world assets, as “cartel-like”.
He also emitted doubt over the fact it will be released “by the very same people who had to explain themselves in front of legislators in the United States and the European Union on the threats to our democracies from their handling of personal data on their social media platform.”