The upcoming Digital Euro, highly discussed in the autumn conference 2020 by the Deutsche Bundesbank, is expected to be introduced by the European Central Bank (ECB). How will the Digital Euro affect our everyday life and do we want/need it?
Germany loves cash payment like almost no other country. However, this is not compatible with the trend towards online shopping, which has become even stronger since the COV19 pandemic. Therefore, the possibility to pay virtually in cash would be necessary. CBDC (Central Bank Digital Currencies) or the Digital Euro would enable digital cash payment. This
is a peer-to-peer payment that is processed immediately, similar to SEPA Instant Payment, but without an intermediary, for instance a bank or a clearing house. The intermediaries such as an automated clearing algorithm or a clearing company for SEPA, which is invisible for the
end-users but aggregates all orders for transactions and provides a competitively neutral, highperformance and cost-effective payment procedure for the processing of SEPA payments, would no longer be needed. By selling for instance your car privately, it is necessary to process
the transaction on a cumbersome way by accompanying the buyer directly to the ATM and only with a trustworthy bank. Cash could be forged, checks could possibly burst or people pay out their money from PayPal. For this reason, a Digital Euro could facilitate such transactions in a positive and easier way and give people more security by exchanging digital money
provided by the central bank.
In addition to everyday transactions there will be many applications in industry in the future, especially through the Internet of Things (IoT) for the Digital Euro. Programmable transactions
have enormous potential because more than 75 billion devices in approximately 5 years will be connected to the Internet and will have an integrated payment system. If, for example, the fridge automatically orders milk online from the local grocery store because it is gone, then this
transaction could be easily processed with the Digital Euro. In the industrial sector, machines will interact economically with other machines so that payments are triggered (machine-tomachine- payments). This will presumably be done via so-called smart contracts, which, provided certain conditions are met, will trigger payments. Any interaction via intermediaries would either lead to restrictions in size (e.g. with SEPA Instant Payment, only transactions up to a maximum value of 100,000 Euro can be processed), in speed or would possibly cause higher transaction costs.
Certainly, the Digital Euro could also be attractive for the ECB. Blockchain-based digital crypto money has been invented and an increasing number of digital currencies are coming into circulation. Furthermore, due to the latest innovation implemented by Facebook, called “Libra coin” the ECB could consider the introduction of the Digital Euro as unavoidable and try to push the digital currency forward. The “Libra coin” is a digital cryptocurrency, considered as a “stable coin” different from other previous cryptocurrencies such as “Bitcoin”. This digital currency is based on a basket of several currencies and government bonds and is thus less susceptible to fluctuations. Therefore, these coins are suitable for regular transactions. Such global stable coins introduced by companies with high numbers of users like Facebook or Google could rapidly become adopted as part of their digital ecosystem (network effects). Based on the increased market capitalization of cryptocurrencies the ECB faces a potential weakening of their monetary authority. In the case of the cryptocurrency Libra, referring to the ECB Director Yves Mersch, their control over the Euro could decline as well as a reduction of the effectiveness of monetary policy could be a consequence. Therefore, the fear of currency competition drives the central banks towards the Digital Euro.
Depending on its design, it would be conceivable that every citizen and every company, as well as the state, could maintain accounts with the ECB. This would be the so-called Direct CBDC or Retail CBDC. Some might criticize that this will make them or their payments more transparent for the state. It is therefore conceivable that a so called Indirect CDBC concept or Wholesale CBDC will be introduced. This would involve banks keeping the accounts and carrying out necessary KYC checks (The “Know Your Customer” process is designed to verify the customer’s identity before a transaction is made in order to protect the company against fraud). CBDC would be used to make the banks‘ payment processing with the central bank more efficient.
In general, the Digital Euro expected to be introduced by the ECB will keep in long term neutrality of our payment systems, ensure financial stability, and will bring along efficiency gains, especially in GDP. However, would CBDC open countries’ borders and lead to an even more digitized world? Can we trust in such a currency and what will it bring exactly for our future?
Literature:
Auer, Raphael; Böhme, Rainer (2020): „The technology of retail central bank digital currency“. BIS Quarterly Review, March 1, 2020.
Bindseil, Ulrich (2019): “Central Bank Digital Currency: Financial System Implications and Control”, International Journal of Political Economy, 48(4), 303-335.
Sandner, Philipp; Gross, Jonas; Grale, Lena; Schulden, Philipp (2020): “The Digital Programmable Euro, Libra and CBDC: Implications for European Banks”. Waltham, MA: SSRN, July 29, 2020.
Sven Schweickhardt, scientific staff member of the chair of Monetary and International Macroeconomics of the University of Hohenheim
moneyathohenheim.blog 