Why did the ECB decide to launch a project for the introduction of the digital euro?
The answer might seem extravagant… ..but the reality is that money and banknotes as we know them could disappear – or at least lose their relevance – in the world of the future.
Until recently it was thought that the digital revolution and the new means of communication would destroy some activities / professions that were, after all, marginal in our society, such as videotape and music stores, which have actually disappeared, now the reflection is it has shifted to activities with a much more glorious tradition. Just to mention two examples: newspapers and paper mail are not doing well at all. Even hard currency, which has its origins in the dawn of civilization and has done so much in our society, could disappear and the banking system could change its face.
Two trends are emerging in our relationship with money.
First of all, also following the COVID_19 which has decreed a boom in online commerce, we are resorting less and less frequently to the use of cash. It happens more and more often that we find ourselves in front of a merchant who tells us ” I don’t have to do the rest, you can pay with an ATM ”. To date, the ATM (or debit card) is the most used payment tool in many developed countries, other payment tools via smartphones are becoming increasingly popular. The use of cash is decreasing rapidly, it is no coincidence that until recently bank branches were decreasing, now it is the turn of ATMs.
The second trend starts with Bitcoin, goes through stablecoins (like Tether), and goes to Facebook’s Diem and digital Yuan (Chinese digital currency). Bitcoin has led the way for three truly revolutionary features: it is a digital native currency that lives on a digital platform (the blockchain), it does not physically exist but it is very easy to use it for online payments without going through a bank, just own it. a wallet, a computer and an internet connection; it has characteristics very close to banknotes as the transactions are anonymous; it does not depend on any authority (central bank) which determines its quantity and value.
To address these two trends, the ECB is gearing up to issue a digital euro.
Let’s take a step back. Perhaps without knowing it today we use two forms of coins: a “ public ” represented by the banknotes and physical coins that we hold in the wallet (also called central bank money and it is no coincidence that the banknotes bear the signature of the president of the ECB), a “ private ” which is represented by the deposits at a bank that we use when we make a payment by debit card. We can switch from the second form of money to the first by withdrawing at an ATM. They are not quite the same. Two aspects make them different: both suffer from loss of value due to inflation but the second form is more risky as if the bank fails we are not sure to review our money (to date we are protected up to 100,000 euros); the second form of money is also expensive due to the fees that the bank charges us for card transactions.
Private money is therefore more risky than central bank money and is managed by a private entity who determines its costs and which also uses the information contained in our transactions to make money. This is the negative aspect of the traceability of online payments which do not guarantee anonymity.
To date, to make a purchase on the web we can only go through a form of private money (ATMs or other apps). The decrease in the use of cash raises alarm. A massive use of private money could prove costly for the citizen, also exposing him to incorrect practices, aspects that are instead absent in the case of using central bank money. To these considerations it should be added that central bank money, which is not risky, represents an indispensable anchor in times of instability. What would have happened without cash in the case of the bank run in 2007, when citizens rushed to withdraw their savings from the failing Northern Rock bank, or in 2013-2015 in the case of the Cypriot and Greek banks defaulted?
Central bankers are concerned about these aspects and are running for cover by designing a digital central bank money that would constitute an anchor similar to cash and that would be usable on the network as it is now possible to do only with private money. On the other hand, history is on their side: historically the competition between private currencies has not held up in the long run causing banking crises (the most classic case is the Scottish private banking crisis in the 1700s which also affected Adam Smith and David Hume) .
After a study phase, the digital Euro pilot project should be launched in 2023. The problem is to act quickly as the risk is that private entities (such as Facebook) or a third monetary authority (the Chinese central bank) will arrive. first. The problem isn’t so much Bitcoin or the stablecoins in circulation. What would happen if an e-commerce platform or social network launched its stablecoin (anchored to a basket of currencies or assets) and captured a significant share of world trade? Even more dangerous is the challenge launched by China: what would happen if the digital Yuan took over in trade with China. In both cases we would see a loss of monetary sovereignty in the Euro area which would mean no longer being bosses in one’s own cash with regard to regulating the conditions of access to credit. An incalculable risk.
The problem is that “haste is the enemy of good”: the ECB is accelerating but the technical problems and economic implications are considerable, the profiles involved are many and not all countries have the same sensitivity in this regard. What is certain is that behind an apparently technical theme – such as the drawing on the digital Euro – there is a decisive game for the idea of Europe linked to the single currency.