Opportunities and Threats of the Digital Euro

Usually, central banks are thought to have little disruptive power. However, since central banks around the globe have been thinking more and more concretely about introducing their own digital currency, “there could be significant disruptions in the financial system,” says Chetan Ahya, chief economist at Morgan Stanley Research.

One thing upfront: cryptocurrencies are not meant here. Although the lines seem to be blurring visibly, it’s not the same thing. 

Money, even in digital form, is still ascribed to the functions and characteristics of a value and unit of account, means of payment and transaction function.

Cryptocurrencies, on the other hand, are either linked to an underlying asset, as is the case with stablecoins – as an example, the “Diem” planned by Meta Platforms (formerly Facebook) – or they are backed by a blockchain, such as Bitcoin.

Almost All Superior

Central bank digital currencies, or CBDCs, are a new form of digital cash. They are backed by a central bank and kept in a kind of “ledger.” According to Morgan Stanley, 86% of all central banks worldwide decide whether to issue digital versions of their currencies.

China is currently the most advanced. There, trial runs with a digital yuan have already been launched in the megacities of Shanghai and Shenzhen. 

Investigation Phase

Access to digital money is to be free of charge, and transactions could be made via a crypto bot, smartphones or cards, for example. For the first time, citizens and businesses could have a balance directly with the ECB. 

But the ECB is responsible for ensuring that cybercriminals do not hack the digital euro wallets, which must take care of this – although euro banknotes have not been forgery-proof in the past either.

In any case, the European Central Bank (ECB) launched a two-year investigation phase in the summer to determine the core properties of the e-euro.

This would come in 2026 at the earliest, according to ECB Executive Board member Fabio Panetta. 

In the next two years, possible advantages, disadvantages and implementation options will be examined in detail. Then it can go into a trial and technical implementation phase lasting several years.

Struggle for Sovereignty

The goals are mainly clear. The fact that we are asked today at the checkout: ‘Cash or card?’ is diversity in action. Cash should be preserved, and so should bank balances. 

But wherever it doesn’t fit or isn’t available, the digital euro should preserve and enrich the diversity of means of payment in domestic currency, not reduce it.

The aim is to prevent retail payments from being dominated by a handful of non-European players that could be relatively immune to the scrutiny of European authorities.

This could weaken competition and data protection. At the same time, a digital euro would be a response to the rise of cryptocurrencies such as Bitcoin and Ether and, overall, to global conglomerates with insecure private currencies entering the market.

Keyword: Privacy

But, such a measure touches at its intersections the legislature – keyword data protection – the financial sector, as its structure is interfered with, and thus financial stability. 

For this reason, it is imperative that the banking and credit industry be involved in the planning phase.

The digital euro is not intended to be an unlimited central parking lot for all private assets in the economy. Individual caps or amount-based interest rates are ideas to manage this parking lot sensibly and prevent possible overuse.

Finally, it is also essential to prevent a bank run. A maximum amount, say 3,000 euros, that individuals can hold in their wallets would also help banish the danger of depriving banks of their important business base and endangering the financial system.

Low-Cost Alternative

Bank customers could withdraw up to 873 billion euros (about eight percent of account deposits), according to a Morgan Stanley calculation. The impact could be more drastic in smaller euro countries, such as Lithuania, Latvia, Estonia, Slovenia, Slovakia, and even Greece.

If all citizens in these countries were to withdraw 3,000 euros and convert them into the e-euro, 17 to 30 percent of total deposits and 22 to 51 percent of total deposits of all households would be affected. Of course, it is questionable whether such a large proportion would actually be converted.

For small and medium-sized businesses in retail and other industries, it would be a low-cost alternative to charging to card-based payment systems. And the benefits for banks: a touchpoint for customer services that promises less balance sheet risk and circumstance, as well as greater reach.

While proponents outline the goal of “providing a secure digital anchor of value for all of us,” there are also more or less gloomy visions of the future. 

The problem is not so much how it prints money but rather how it recaptures the vast quantities of euros that are now hardly matched by sustainable values. Whether digital or paper, the expropriation of citizens will – sooner or later – be necessary.