As digital transactions gain momentum and technological developments redefine our relationship with money, the European Central Bank is preparing for one of the most important steps in modern monetary policy: the introduction of the digital euro. What exactly is this new means of payment? How will it affect citizens, businesses and the banking system? What are the opportunities and challenges it brings? In this interview with Associate Professor in the Department of Accounting and Finance at the University of Cyprus Evangelos Benos, we attempt to shed light on all aspects of this topical issue.
What is the digital Euro?
The digital euro is the digital evolution of banknotes. It is an official digital currency that is currently being prepared and that any citizen or company in the Eurozone will be able to use, on a daily basis, to accept or make payments anywhere in the Eurozone.
Who will issue this currency?
It will be issued by the European Central Bank (ECB), which also issues euro banknotes. Let us say here that the ECB already issues electronic money in the form of reserves, which it uses to conduct its monetary policy (e.g. quantitative easing), and commercial banks also use it to make payments between themselves (e.g. to make interbank loans). With the advent of the digital euro, the use of this type of money by banks will be extended to the whole population.
Electronic transactions are also now possible in all currencies. Why do we need a digital Euro?
The digital euro is expected to reduce both the time and cost of payments in the euro area.
In terms of time, payments with a digital euro will be processed instantly, because the processing will be done directly on the ECB’s balance sheet. Today, many payments made through banks take a full working day to be processed.
As regards costs, these are also expected to be reduced. Citizens will be able to make payments in digital euros for free, while for businesses the cost may not be zero but will be reduced. For example, today, the majority of businesses that accept electronic payments in euro by card can process them through two or three companies operating networks. These companies form an oligopoly in the payment market with correspondingly high charges.[1] The digital euro will therefore provide businesses with an alternative payment method at lower cost. It is expected that the entry of the digital euro into the payments market will force existing companies to lower their prices in order to remain competitive.
Something similar is expected to happen with account-to-account transfers. In other words, people will be able to transfer money free of charge via the digital euro, which will put pressure on banks to reduce the fees they charge for making payments.
Finally, cross-border card payments in the euro area currently rely heavily on non-European private companies. The digital euro will be a purely European solution that will reduce the euro area’s reliance on third countries to process such payments.
Does the digital Euro belong to the cryptocurrency category?
No. The main difference is that cryptocurrencies are private, as they are not issued by a public authority and there is no legal requirement to accept them as a means of payment, as is the case with official currency. Instead, the digital euro will be the digital version of the official currency of the Eurozone, the euro. The digital euro will, however, have some similarities with cryptocurrencies. In particular, it will also be digital, will be easily accessible and will provide relative anonymity, especially for small transactions, as is the case with cryptocurrencies.
Where will we be able to use it?
It can be used for any euro payment anywhere in the euro area. This includes money transfers from one account to another, payments to buy goods online, daily payments at the point of sale (via POS terminals) as well as local user-to-user money transfers. In other words, the digital euro will be able to be used for both online and offline payments.
This last one is particularly interesting: using, for example, a card or a mobile phone, a user will be able to transfer digital euros to another user’s account simply by bringing his or her mobile phone in close proximity to that of the other user. This will be done in a completely anonymous way. It will be the electronic equivalent of taking a banknote out of your wallet and giving it to an acquaintance.
Should citizens have to pay to use the digital euro?
No, opening accounts and using the digital euro is planned to be free of charge for citizens. Businesses, on the other hand, will probably have to bear a cost of maintaining a digital euro account which the banks they deal with will be able to charge. Whether this charge will exist and how high it will be will depend on the final form of the digital euro scheme. In any case, it is envisaged that the cost will be low for businesses – and lower than the use of credit and debit cards – so that there will be an incentive to use the digital euro for a wide range of transactions.
How will a citizen be able to access the digital Euro?
For most citizens who have bank accounts, access to the digital euro will be available through their banks. Banks will be obliged to facilitate the opening of digital euro accounts, which can be linked to bank accounts. This means that there will be the (optional) possibility to transfer money automatically from the bank account to the digital euro account and vice versa.
But the digital euro will also be available to those citizens who, for various reasons, do not have bank accounts, of which there are many (the ECB estimates that there are 13.5 million in the euro area). It is envisaged that each country will designate an organisation (e.g. the post office) that can open digital euro accounts for these citizens.
In any case, it is important to say that each citizen will be able to have a single digital euro account in their name and each account will be identified by a unique number, the Digital Euro Account Number or DEAN for short.
Why is there a limit of only one digital euro account per person?
The reason is that the ECB wants the digital euro to become a means of payment in the euro area and not a savings instrument. For this reason, there will also be a cap on the holding of digital euros for individuals (in the range of a few thousand euros) while businesses will be able to transact in digital euros but will not be able to retain them.
This does not mean that we will not be able to transact with digital euros in any amount we wish, and this is where it becomes necessary to link digital euro accounts to bank accounts. Perhaps an example would be useful. Say someone has 20,000 euros in a bank account and wants to buy a car using digital euros. Assume also that the digital euro holding limit is 3,000 euros for individuals. This individual can go to his digital euro account and instruct the car dealership to make the payment of 20,000 euros. Then, automatically, the money will be transferred from the bank account to the digital euro account and sent immediately to the digital euro account of the dealership. Since companies will not be able to retain digital euros, the 20 000 will then in turn be automatically transferred to the bank account of the dealership. In short, neither the buyer (subject to the EUR 3 000 limit) nor the dealership will be able to keep these 20 000 euros as digital euros from one day to the next. They will always have to be transferred to and from bank accounts within the same day.
This is appropriate because the ECB wants the digital euro to become a fast and cheap means of processing transactions, not a savings instrument.
And what about the security of citizens and the protection of privacy? Everything that happens in a digital environment leaves an imprint.
Privacy in the use of the digital euro will be inversely proportional to the value of transactions. Small transactions will be able to be up to fully anonymous while large transactions will not. For example, transactions made through linked bank accounts will provide similar levels of privacy as today’s banking transactions. But small transactions made offline using cards, or a mobile phone application, will be able to be fully anonymous. In these cases, a person will be able to “top up” their card with digital euros (e.g. at an ATM) and spend them in a fully anonymous way, just as they can do with cash.
In all cases (whether online or offline), the ECB will not know the identity of either the originator or the recipient of each payment, as this information will be encrypted.
What do you expect the reaction of private financial institutions to be? Won’t they lose some revenue from transaction fees?
When the discussion about the digital euro started, the main concern of banks was that they would lose their deposits as there was a serious possibility that people would withdraw them to convert them into digital euro deposits. This risk has now been minimised given the cap on holding digital euros and the fact that deposits in digital euros will not be accrued.
From then on, banks may be forced to reduce transaction charges due to increased competition or even lose a share of this market. But, if charges are eventually reduced, this will be good for the banks’ customers and the smooth functioning of the payments market in general.
Is the adoption of a digital euro expected to facilitate trade within the euro area?
Probably, and the main reason is that the digital euro, as we said, will reduce both the time and cost of transactions. I expect that the biggest benefit will be in cross-border payments (i.e. payments between accounts in different eurozone countries) as these are the ones that now cost the most in terms of time and money.
In addition, as mentioned, the digital euro will be accessible to citizens who do not have bank accounts. These citizens will now be able to transact digitally, which will broaden their choices in terms of purchasing goods and services.
Can this digital currency replace cash in the future?
Possibly. The digital euro will have almost the same properties as cash, just in electronic rather than physical form, which will make it easier to use. So there is a possibility that people will prefer it to cash. However, as long as there is a demand for cash, the ECB has decided to keep banknotes in circulation to meet that demand. So if cash is ever replaced, it will be because people do not prefer it, not because the ECB has decided to withdraw it.
What stage is the digital euro project currently at?
It is in the ‘preparation’ phase. This means that the underlying technology of the digital euro applications is being tested and the details of the institutional framework are being discussed (e.g. what will be the maximum amount of digital euros that citizens will eventually be able to hold, what will be the cost for businesses, and so on). This phase is expected to last until the end of 2025 when a final decision on its issuance will be taken.
Source: University of Cyprus | Latest news (https://tinyurl.com/uwu3jkur)