The year is 2028: a crane puts a container on the dock in the Port of Hamburg. A smart system recognizes that the goods have now reached the buyer’s territory and processes the payment automatically – using digital central bank money. The brave new world of a digital euro is a vision of the future, but the Governing Council of the European Central Bank (ECB) has long since done the preparatory work.
On June 28, the European Commission wants to lay the foundations for the ECB to launch the project from October with a legislative proposal. It could become a reality in three to four years.
The digital euro should be something like digital money that is not kept in a bank account, but in a digital wallet, a so-called wallet, for example on a smartphone. It is intended to supplement banknotes and coins, but not to replace them. In principle, the digital euro is a competitor for credit card providers such as Visa or Mastercard, but also for payment service providers such as Paypal or Klarna. However, the design is about being “faster, more secure and cheaper” than classic payment systems, emphasizes Joachim Wuermeling, board member of the Bundesbank. Another consideration is to make bulk payments in Europe less dependent on international providers, says an insider.
Gradual introduction planned
Developers have been tinkering with the digital euro for quite some time in design laboratories. A phased introduction is currently being considered, with certain functionalities of the new digital currency being introduced only gradually. In addition to the digital euro for everyone – often referred to as “retail CBDC” in the professional world – there are also considerations for a digital euro for interbank payments – usually referred to as “wholesale CBDC”. At the moment, however, consumer payments at the checkout or in online commerce, payments between consumers and payments from and to government authorities are of particular importance.
From the point of view of Kevin Hackl, head of Digital Banking and Financial Services at the digital association Bitkom, the digital euro should be technologically equivalent to the available cryptocurrencies. “Otherwise it’s not competitive.” One of the decisive factors in this is compliance with the so-called ERC-20 standard, so that the digital euro on Web3 can be used on decentralized blockchains. Web3 describes a new generation of the World Wide Web based on blockchain technology. This enables an encrypted database to store crypto assets and all transactions with them.
For Philipp Sandner, cryptocurrency expert and professor at the Frankfurt School of Finance, the fundamental question of added value arises as the ECB focuses on the consumer when designing the digital euro. “There are already other proven and popular offerings out there, such as credit cards or mobile phone payments. The ECB only has a chance if it charges retailers – both online and offline – significantly lower rates than, for example, credit card providers.”
Political will is no guarantee of success
Bitkom expert Hackl finds it understandable that the EU and the ECB wanted to emphasize their claim to sovereignty in payment transactions with a digital euro: “But the question remains whether the legislator or the central bank are the right organizations to bring about innovations themselves or would rather should set the framework for private sector solutions.” Professor Sandner also warns that the political will to introduce a digital euro is no guarantee that it will be used as a means of payment, as ultimately consumers would decide the success of the project: “The digital euro is coming because the ECB persists in pursuing her plans. The political will is there, but it is not yet clear whether it will succeed.”
The chairman of the German Savings Banks and Giro Association, Helmut Schleweis, is concerned that the ECB itself could enter the payments market as a competitor and thus deprive the banks: the question is “whether it should hold accounts for end customers. Whether it introduces programmable money – programs that can be used to politically direct payments and enable tracking,” he said recently at the German Savings Banks Day. A Commission official rejects this “Big Brother” scenario. With a digital euro, the central banks would not have access to the identity of the payer. On the contrary, there would be opportunities for commercial banks, citizens and companies to make this cyber motto accessible: “Of course, these are also opportunities to build additional services on top of the digital euro – such as innovative means of payment.”
New risks to financial stability
Experts also fear new risks to the financial stability of the e-euro. Because users can bet that the new digital currency is much more secure than the funds in their bank account and can transfer more amounts to their digital wallets. This would not be an easy situation for banks with strong deposit-taking activity. Because these funds would no longer be available to the financial institutions as a stable and cheap source of refinancing. According to calculations by DZ Bank economists, customer deposits of around one trillion euros could flow from bank accounts into the new form of money.
In a banking crisis, such a flight of deposits could happen very quickly: instead of queuing at the ATMs, consumers could transfer amounts to the digital currency with the click of a mouse, as the financial services company W&W explains in a special report on the danger scenario of a digital bank run. This is already a problem: the most recent banking crisis in the US has shown that customer responsiveness has increased enormously thanks to modern communication options via social networks and internet banking, he explains. Customers there had withdrawn many billions of dollars in deposits from troubled regional banks within hours.
Borders and inverted waterfalls
To avoid these risks, the e-euro designers have put into play a limit, an upper limit, on how much digital euro an individual can hold. In 2020, Ulrich Bindseil, Director General of Market Infrastructure at the ECB, once proposed an upper limit of €3,000 in a widely acclaimed study. It was based on the average household income in the Eurozone. Other considerations take the amount of cash the individual has in their wallet on average per month as a guide – but the limit would then be significantly lower.
To this end, the electronic wallet could be equipped with certain functionalities to comply with the limit. For example, if it gets too full and the limit is exceeded, money could automatically flow into the docked account at the bank. The designers at Digital Euro call this the “waterfall function”. The opposite case occurs if the wallet does not contain enough e-euro to make a payment, for example. In this case, the missing amount can automatically flow from the linked account and fill the gap – “reverse waterfall” the developers call it.
Source: Krone
I’m Ben Stock, a journalist and author at Today Times Live. I specialize in economic news and have been working in the news industry for over five years. My experience spans from local journalism to international business reporting. In my career I’ve had the opportunity to interview some of the world’s leading economists and financial experts, giving me an insight into global trends that is unique among journalists.
