The digital euro will be a reality in the years to come. While central bank digital currency offers several advantages, such as faster transactions than with a bank or a more stable money supply, it also has its share of disadvantages. In particular, it increases the power of the state over citizens’ finances. Some even claim that the digital euro will become a threat to Bitcoin. We take stock of the advantages and disadvantages of the European Central Bank project.
By 2025, the European Central Bank (ECB) will launch a digital euro in all euro area countries, ECB President Christine Lagarde recently announced. Planned to exist alongside banknotes and coins, this digital currency has already been the subject of a three-month public consultation. At the end of this consultation, 8,221 citizens, companies and professional associations gave their opinions on the form that this future digital euro should take.
“The digital euro will be like banknotes, but in a digital form to make daily payments quickly, easily and securely,” explains the European Central Bank.
According to the ECB, the boom in mobile payment and the collapse in the use of cash during the Covid-19 pandemic precipitated the development of the project. The ECB’s SPACE study (Study on the Payment Attitudes of Consumers in the Euro area) indeed shows that Europeans have largely abandoned cash since the entry into force of health measures against Covid-19.
Cash only represents 48% of the total value of purchases made in a physical store. From now on, the bank card represents more than 40% of purchases made in the European space in physical stores. Eventually, cash will inexorably disappear.
“Europeans are increasingly turning to digital in their consumption, savings and investment patterns. Our role is to preserve confidence in the currency, ”explains Christine Lagarde.
The European Central Bank has extensively highlighted the advantages of the digital euro in its press releases. Thanks to its digital currency, the ECB first promises transactions that are faster than a bank transfer. In fact, transactions between a digital wallet and another should theoretically be instantaneous, like the transfers offered by some mobile banks like Revolut. Digital euro transactions will not require interbank settlement. De facto, a sum of money can be transferred at any time, whether it is the weekend or a public holiday. Currently, bank transfers are based on Target 2, a payment system operated by the ECB. This system closes all weekends and holidays. It can sometimes take several days for a transfer to appear on a recipient’s account.
The digital euros will be stored in a “digital wallet”, accessible on smartphone or computer. All digital infrastructure will be managed by the ECB. This wallet replaces the bank account provided by banks. As the digital euro is issued directly by the ECB, it will avoid bank deposit fees. Ultimately, the digital euro has a lower cost than the euro. In the process, this central bank digital currency will promote financial inclusion for people who do not have access to banking services. It will suffice to have a terminal connected to the Internet, such as a smartphone or a PC.
To secure the digital euro, the European Central Bank should rely on blockchain technology. This technology, which is the basis of the Bitcoin protocol, makes it possible to record information in an ultra-secure and immutable way in a decentralized register. Finally, money deposited in a digital account at the ECB should be more secure than assets deposited with a traditional bank.
Thanks to the digital euro, the ECB will also be able to improve the management of the money supply in circulation. First, it will be easier for the ECB to determine the number of currencies in circulation by going through a digital infrastructure entirely under its control. Secondly, the institution can easily “burn tokens” to avoid the risk of inflation. In order to make monetary money more flexible and “elastic”, smart-contracts or smart contracts could be exploited. These contracts would automatically adapt the available money supply in order to ensure that the price of the currency and the purchasing power of consumers remain stable.