Digital Euro: The Future of European Banking and Payments

2023-10-18 16:45:05

Frankfurt (awp/afp) – Will every European one day have a digital euro bank account issued by the European Central Bank (ECB)?

This perspective is taking shape as the Frankfurt institute gave the green light on Wednesday to a two-year “preparatory” phase for this new form of virtual currency.

The European authorities – Parliament, Commission, Council, Eurogroup – must give the digital euro an official status but it is the ECB which will ultimately decide on its creation.

Why a digital euro?

The ECB wants to support the explosion of dematerialized payments, which has increased with the Covid-19 pandemic.

In terms of payment values, cash represented more than 42% of transactions by consumers in the euro zone in 2022, compared to 54% in 2016, according to a study by the institution.

The ECB fears that this craze will benefit private virtual currencies – used in the form of payment cards or mobile applications – or foreign currencies.

Meta (Facebook, Instagram, etc.) has buried a first digital currency project but is once once more considering launching a virtual means of payment coupled with other financial services, the Financial Times wrote in April.

“A digital euro would strengthen the efficiency of European payments and contribute to Europe’s strategic autonomy,” according to Fabio Panetta, member of the ECB board.

Around a hundred other central banks, notably China and the United States, are also working on issuing their own virtual currencies. Beijing has been testing the e-yuan on a large scale since 2021.

In the long term, the digital euro will not replace cash, assures the institution, which is also working on a new series of euro notes, more secure and with a renewed design.

What is the benefit for consumers?

Households and businesses will be able to hold their digital euros directly with commercial banks. One of the advantages is that this money will be guaranteed, whatever the amount, in the event of a financial crisis.

The ECB wants to offer citizens a digital payment method that they can use free of charge anywhere in the euro zone, in stores, online or between individuals.

The digital euro also aims to be inclusive, being able to make life easier for the four million Europeans currently without a bank account.

But in an already “hyper-banked” world where each citizen has a number of means of payment, “the idea of ​​launching an additional means of payment is not spontaneously natural”, recognizes Erick Lacourrège, general director of means of payment at the Bank of France.

The issue is nevertheless “much broader”, including issues of “sovereignty, fragmentation of means of payment and the privatization or not of the currency”, he adds.

What is the difference with a cryptocurrency?

A cryptocurrency like bitcoin is not an official means of payment. Its unit of account is issued by private organizations, or controlled by participants in a computer network.

The issuance of new bitcoins is regulated by an algorithm, not a monetary policy committee.

The ECB, which never misses an opportunity to vilify cryptocurrencies, assures that the digital euro will be “a means of payment, not a form of investment or savings”, according to Mr. Panetta, the opposite of the world very speculative of digital currencies, whose price looks like a roller coaster.

What risks?

The ECB guarantees that it will not have access to citizens’ personal data, having taken into account this concern among Europeans regarding the risks to the protection of their privacy.

Data should be better protected with the digital euro than with equivalents offered by private providers, assures the ECB.

But the path is narrow because there is no question of offering the same guarantee of anonymity as cash, for reasons of fighting financial crime.

Commercial banks are openly concerned regarding individuals migrating their deposits to a central bank currency account.

Above all, a consortium bringing together 16 large European private banks is already developing a payment solution with very similar use cases, called the European Payments Initiative (EPI).

Also digital euro accounts will be capped: an amount of 3,000 euros is mentioned, close to the average gross salary in the euro zone and avoiding creating tensions with commercial banks.

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