The digital euro — when it's coming and what it promises

In January 2021, Christine Lagarde, President of the European Central Bank, announced: “We will have a digital euro.” In about five years, the e-euro should be introduced in parallel with cash. However, Lagarde's promise was put into perspective again in the following months: The ECB now wants to decide in the middle of the year whether a formal project on the digital euro will be launched. However, valuable time may be lost because the EU is already playing a laggard role compared to the rest of the world. China has been working on the e-yuan since 2014, which is already in the test phase. And Facebook is launching its own, digital world currency with “Diem” (originally: “Libra”) in 2021.

A decision from the ECB remains to be seen. But one thing is already clear: The e-euro would be an adequate answer to private-sector initiatives such as Bitcoin, Diem or digital central bank money from other countries. And it would have the potential to fundamentally change our financial system.

EU is laggard on digital currency

Many central banks have already recognized this and are pressing ahead with the development of their own digital currencies. However, despite the numerous benefits of a CBDC (Central Bank Digital Currency), the ECB is reluctant.

In January, the Bank for International Settlements (BIS) published the Results from their third survey from 65 central banks worldwide on the subject of digital currencies.

According to this, 80 percent of the central banks surveyed are already working on a digital currency. Around 40 percent of them carry out appropriate experiments and feasibility studies. Ten percent are specifically concerned with developing a digital currency or setting up a pilot. Some reasons for the intensive research and development work carried out by central banks include:

• Decreasing cash usage

Since the corona pandemic at the latest, it has been clear that even cash-savvy Germans are increasingly using card or contactless payment options. According to a survey by the German Banking Association, there are now barely figures 60 percent of Germans with a card or smartphone — The trend is rising. Government of Sweden wants to push cashless payments even further. The goal: Coins and paper money should disappear completely in the long term.

• “Internet of Things”

Machines connected to the Internet (Industry 4.0) could process payments between each other automatically. Using Smart Contracts Connected devices would be able to generate invoices, receive payments and transfer money in accordance with defined rules. Transactions would be made without an intermediary bank and complex payment instructions.

• Transactions worldwide in a matter of seconds

One of the biggest advantages of digital currencies would be quick and cost-effective transfers — even across national borders, as well as the advantages of micro-payments.

• Request for anonymity

Another key aspect is privacy: In mid-April 2021, the ECB adopted the Results of a public consultation published on the digital euro. They show that protecting privacy during digital transactions in particular is a top priority for 43 percent of those surveyed. One advantage of the e-euro over digital currencies from private providers would be that no personal data is transmitted during transactions.

The BIS summarizes how important the most advanced CBDC projects are in a global context as follows: “Although sentiment is fairly unchanged, central banks with specific plans to issue a CBDC are about to be introduced. Around ten percent of the central banks surveyed are likely to issue a CBDC for the general public soon, which will affect 20 percent of the world's population.”

However, Europe is significantly lagging behind when it comes to developing its own digital currency by international standards. Numerous experts point out that the EU is around six to eight years behind with regard to CBDC compared to China and published a roadmap for a digitally programmable euro by 2024. IT industry association Bitkom wants to drive the digital euro forward so that Europe does not lose touch in a global context.

Design issues of the e-euro: issuance, access, interest rates

However, it will not be possible to meet the required time frame, as there are still too many unanswered questions. This is how she states LBBW in a publication: “The digital euro is coming, but not before 2030.” There is already agreement that the e-euro should in no way replace cash. But there are still numerous details to be clarified about its exact design:

• Issuance by private organizations or central bank?

For example, either the central bank itself could issue a CBDC or regulated, private institutions could issue a so-called digital fiat currency (DFC) — the tokenized, digitized image of a fiat currency.

• Tokenized or account-based?

It is also being discussed on Which basis The digital euro is to be realized. Either account-based or token-based access to digital central bank money is an option. In the case of an account-based solution, citizens would have funds in a “wallet” directly with the central bank. Token-based CBDC involves designing a digital token that is not connected to central banks' business accounts.

• Interest rates or negative interest rates?

In principle, balances in the e-euro account should be limited — presumably to a maximum of 3,000 euros. According to the ECB, it should not be used to save or invest, but to consume. However, the central bank could set different key interest rates for e-euros than for traditional cash and book money.

Conclusion: Introduction of a digital euro depends on security and acceptance

The digital euro is intended to ensure Europe's monetary sovereignty and a Dependence on cryptocurrencies from other countries or “big techs” prevent. Its benefits for the economy and its digital transformation would also be significant. However, when introducing the e-euro, it is crucial that security and financial stability are maintained, banks are involved in the process as trustworthy intermediaries and that acceptance by industry and the population is ensured.