After the Covid-19 pandemic increased the use of electronic payments and accelerated the shift away from cash, European policymakers are now thinking of how to approach the new fintech and cryptocurrency wave which is here to stay. Moreover, the tech industry is rapidly innovating and developing new forms of currencies, Facebook’s controversial Libra being one of them. As finance ministers and central bankers from the G7 club are publicly standing against the launch of the global stablecoing project of Facebook, on the 12th October the European Central Bank (ECB) began a public consultation on whether to introduce a “digital euro” for the nineteen countries members of the Eurozone.
A new type of digital currency?
For what is known now, the digital euro will complement cash payments rather than replace them altogether – retailers could accept it as an alternative to cash and friends can borrow digital euros from each other. One way to think about the digital euro is as an electronic banknote that is stored on an app, guaranteed by the ECB. One digital euro will always be worth the same as a one-euro coin, and the ECB will also ensure all of your money is safe in case you lose your phone. Presented as such, the guarantees of the ECB will differentiate the digital euro from cryptocurrencies such as Bitcoin, which do not protect their users against cybertheft and often fluctuate in value.
Benefits and drawbacks: safety, privacy, costs, and regulations
From a user’s perspective, the digital euro won’t look much different than viewing an online bank account, but the main difference will derive from the way the back-end process of paying. The way it will work is that the user’s bank will send a message to a clearinghouse requiring it to transfer money from its account to the recipient’s bank. The clearinghouse will then verify the details and arrange the transfer – debit the sender’s ECB bank account and credit the account of the recipient. This process, however, may take up to two days. Moreover, before the digital euro could be commercialized, a few safeguards should be implemented in order to avoid potential drawbacks for the economy in the Eurozone. Since savers may want to hold all of their digital euros instead of depositing their money in banks in order not to pay interest rates, this could lead to a stagnant economic activity. The ECB is contemplating on how to limit the chance of such occurrences – one possible solution is to introduce an upper threshold for the amount of digital euros that users can hold or charge people for holding large amounts of the currency.
On the other hand, the digital euro could potentially decrease the cost of transactions as the ECB will keep its own ledger and automatically track the owner of each digital cent. The other possible way is for the ECB to use already existing decentralized ledger-keepers, similar to that of Bitcoin, which use blockchain to record its transaction. “From a user’s point of view, we can imagine the digital euro in two ways – one is just like the current digital wallets that banks and companies offer to their clients and the second way is similar to bitcoin: everyone will have their own wallet without the need to use intermediaries,” explains in an interview for Bloomberg Petko Karamochev – founder of the digital consulting and development firm INDUSTRIA.tech.
Another big advantage that would result from the introduction of the digital euro is the enhanced protection and privacy of the users. Digital euros could be the middle ground solution for the issues of “too little” and “too much privacy”, which result from online/credit card and cash payments. The ECB may introduce electronic fingerprints accessible only to authorities so that it protects people’s data and at the same time prevents other people from transferring illicit money. There are also plans to enable the use of the digital currency without phone reception and Wi-Fi by using Bluetooth and sending an electronic IOU token that will be used to update the ledger when the user is back online. “When we are talking about the digital euro, this means zero costs and no negative interest rates, which we have witnessed in the past couple of years. This means that for the users it will be much less risky to hold their money in digital euros,” concludes Karamochev.
What comes next for the digital euro?
The ECB will conduct in-house experiments during the next six months and will reveal its final decision on whether it will launch the digital euro in mid-2021. According to Karamochev, the ECB will be ready to commercialize the digital euro before 2023 as currently, there are still risks that it would pose to the banking sector. He also comments that on a national level Bulgaria is not technically equipped for the development of blockchain infrastructure. This, however, doesn’t mean that Bulgaria is isolated as there are a lot of tech companies which are working on the development of blockchain solutions for connecting the country with the rest of the world and Karamochev expects that in a couple of months we will witness the realization of some pilot projects.