Saturday 17th July 2021
The new major project of the ECB
Digital euro – what consumers can expect
From Birgit Haas
The ECB is driving the digital euro forward. But why? Does she want to get rid of cash? Is digital money safe? The financial system will remain the same, says the central bank. It is still a change for consumers. Here are the answers to the most pressing questions.
The digital euro is coming. The Governing Council decided on Wednesday. All citizens of the euro area should in future have a digital purse, a so-called wallet, with central bank money in it. That is the plan. As simple as the idea sounds, there are still many open questions to be answered on the way there. Here are the most pressing ones:
What do EU citizens get from the digital euro?
Unlike bank and credit cards, digital cash must be accepted by all merchants within the euro area. But that does not mean that physical cash is disappearing, the digital euro is a supplement, a second cash.
What is the difference between the money in the account and cash?
As long as the money is in the customer accounts with the commercial banks, it is book or deposit money. The customers only have a right to the bank for this money. However, if the bank goes bust, customers have to turn to the Deposit Protection Fund to get the money back. Unless you have converted it into cash at the counter or ATM beforehand. This means that the claim against the commercial bank expires and one against the central bank arises: it guarantees the stable value of the cash. The cash in the wallet is therefore safer than that in the account – unless the wallet is stolen.
The digital euro has the advantage that it is as secure as cash, but cannot be stolen. However, tackling pickpocketing is not the main motivation for the ECB to develop the digital euro.
Then why is the ECB developing the digital euro?
Whether you have your money in your account or in cash under your pillow makes no difference as long as the economy is stable. Only in a crisis – such as the financial crisis of 2008, when banks went bankrupt in a row – is the higher security of cash an advantage. However, the ECB is concerned that people are using cash less often, fueled by increasing e-commerce, digital payment methods and online banking.
Only 20 percent of the total amount of euros is currently cash. Since the digital euro can also be used to pay in cash online, the rate should rise again and, according to the ECB, protect the sovereignty of the currency. That is a concern of the central bank. “Otherwise,” says Fabio Panetta, member of the Executive Board of the ECB, “someone else will take over.” The idea that it could be a cryptocurrency like Bitcoin is likely to trigger panic attacks in the ECB’s committees. These are considered unstable due to a lack of supervision and regulation.
What rules will apply to the central bank account?
In times when commercial banks charge negative interest rates for deposits of 50,000 euros or more, it almost sounds too good to be true: The credit balance at the central bank is interest-free. However, those who already see themselves shifting their financial assets internally are looking forward to it too early. The amount on the central bank account is capped; there is currently much talk of an upper limit of 3000 euros. Also to prevent people from redeploying their money as soon as the economy is going badly.
“That could trigger a banking crisis,” says Panetta. But what if there is 2800 euros in an account and a creditor pays back 500 euros in debts? The ECB is still looking for solutions for this. It is likely, however, that a negative interest payment will also be due if a certain amount is reached on the central bank account.
And how do you get such an account?
The ECB wants to involve the commercial banks, they will continue to act as intermediaries between central banks and consumers. The ECB simply does not have enough staff to take care of the administration of the accounts. In addition, the authority expects the digital euro to better contain money laundering, terrorist financing and money laundering. But the evaluation of the data required for this would also be better off with banks that already have experience with it.
How secure is the normal customer data when the money transactions are evaluated to fight crime?
So far there have only been ideas. One of them is that the identities behind the transactions remain hidden from the commercial banks. Only the ECB could lift this veil in the event of anomalies. According to a survey by the agency, people feel more secure when their data is with a public institution rather than a private institute. There is also the consideration of completely anonymizing payments between 70 and 100 euros at a certain frequency – several thousand a day would be suspicious.
Does the digital euro work like a cryptocurrency?
That too has not yet been decided. The ECB is testing two systems: One is the Target Instant Payment Settlement (TIPS) electronic payment system introduced in 2018. It allows payment service providers to transfer money to their customers with central bank money in real time. In contrast to distributed ledger technology, commonly known as blockchain and the basis of cryptocurrencies, it is a central system. All threads then came together at the ECB.
A distributed ledger, on the other hand, would have the advantage that transactions are linked to conditions, which could make trading across borders more efficient and cheaper. Both options meet the requirement of being able to process 40,000 transactions per second. Before deciding which system offers more advantages than disadvantages, the ECB is likely to have two more years to examine both options.
Two years? And when will the digital euro come?
That can take until 2026. In two years, the ECB will present its concept to the EU Commission, Parliament and other regulators. They must agree to the introduction of the digital euro and adapt European laws. Then the central bank rolls out the project. She has three years to do this.
The article first appeared at Capital.de