Posted on Oct 22, 2020 at 11:10 a.m.
The European Central Bank kicked off the consultation on “the digital euro” on Monday. This will last three months and will aim to determine the expectations of the general public, the financial sector and institutions.
Why create a new currency? What would be the advantages? And the disadvantages? The explanations of CQFD.
1. What is it?
The “digital” euro would be an electronic form of central bank money. There would be coins and banknotes in parallel without making them disappear. A digital currency is a unit of account that is transmitted over a computer network, from user to user. The participants in the network create exchanges between them without any currency. The digital euro therefore allowed everyone, households and businesses, to make daily payments quickly, easily and securely, says the ECB.
These currencies could be stored in a “digital wallet”. It is envisaged that individuals and businesses can deposit this currency directly with the central bank. Its access has so far been restricted to commercial banks. This currency should not be a speculative cryptocurrency but rather a currency of exchange. It would make it possible to make purchases, to send money, or to receive it, while using a currency already known.
2. Why create a new currency?
Several scenarios, in which a digital euro would prevail, are put forward by the ECB. The first of them is based on the rise of paperless payments, which exploded during the pandemic. Its promoters argue in particular that the transactions would be much faster, even instantaneous, since they do not require interbank settlement, and therefore available 24 hours a day, 7 days a week. At the same time, cash payments are plummeting. Even in Germany, a country where cash has long been king, in 2020 consumers spent more money on cards for the first time.
The stake is also geopolitical. The ECB does not want to leave the phenomenon in the hands of Facebook, commercial banks, or even foreign powers. In 2019, Facebook’s project to create a virtual currency, Libra, “precipitated the thinking of central banks,” Frederik Ducrozet, expert at Pictet Wealth Management, told AFP. In addition, several countries, such as China or the United States have started to seriously consider issuing their own cryptocurrency, pushing the ECB to organize a response. “Europeans are increasingly turning to digital in their consumption, savings and investment patterns. Our role is to preserve confidence in the currency. […] We must be ready to issue a digital euro if this proves necessary, ”said ECB President Christine Lagarde.
Another stated advantage: the management of the money supply would be simpler in digital version. The digital euro would also be a new channel for the monetary policies of the central bank. It would have direct access to citizens and could therefore, in particular by setting a rate of remuneration, “directly stimulate household consumption or business investment”, writes the ECB.
3. Are there any security risks?
A promise is made, by the ECB itself, that this new currency will be risk free for European citizens. Several avenues are explored to guarantee the safety of the device.
The “digital euro” mechanism could, for example, be based on blockchain technology, a computer protocol reputed to be tamper-proof, on which virtual currencies such as bitcoin are already based, but without the volatility of cryptocurrencies. Nothing is decided. “It is too early to choose a specific design for the digital euro,” warns the ECB.
4. What are the brakes?
The main risk is the flight of savers to this new form of money, which would weaken the banks in the euro zone. The digital euro would effectively allow customers to avoid the costs of a traditional deposit account. This risk is all the more important in times of crisis, when savers, defying the banking system, could convert their current accounts.
To avoid this pitfall, the institute proposes in particular to limit the number of digital euros that everyone could own or exchange. Deposits could also be subject to the punitive ECB interest rate on deposits (currently -0.5%).
5. When could it see the light of day?
From October 12 and for three months, “citizens, academia, the financial sector and public authorities” will be surveyed. In parallel, payment experts will have to determine the best technical solution. These experiments will be done “without prejudice to the final decision,” says the ECB.
Experiments will then be carried out for six months. The ECB will then decide “around mid-2021” whether or not to start the digital euro. But even in the event of a green light, it will then take “between 18 months and up to 3 or 4 years” to see the initiative materialize.