The European Central Bank (ECB) is working to improve the digital euro in terms of privacy, security, and accessibility in a way that is similar to cash. However, concerns remain about its design and need. In euro-neutral regions, digital payments and online purchases are increasing, while the percentage of cash payments is declining. In October 2021, the ECB began a study phase on the possibility of issuing a digital euro.[1]
In June 2023, the European Commission proposed the necessary legal framework for the implementation of the ECB’s digital euro project. It is now up to the common legislators to finalize this proposal.
The digital euro issued by the Central Bank would be the least likely public money to carry a financial risk. Markus Ferber, a member of the European Parliament, stated that the digital euro should be seen as complementary to existing currencies. The ECB envisions the digital euro as a universally accessible and secure electronic currency. This would be the electronic equivalent of cash rather than crypto assets.
First, the consumer must create a digital wallet in euros and then replenish it with a bank account or cash deposit. Organizations distributing digital euros should provide free support and services to those who do not have a bank account. It was also emphasized that there is a right to access public money and that there should be a return option for those who do not have a bank account to access the digital euro.[2]
Europe needs a digital payment solution. Because the lack of national card systems and the reliance on international providers cause fragmentation in Europe’s payment options. According to the ECB; A single payment option, the digital euro, will solve this fragmentation. It is stated that the digital euro is a solution that consumer associations will want. In addition, digital currency will reduce dependence on the banking sector.
There are many countries where it is considering issuing a “European Central Bank Digital Currency (MBDPB)”. As an example, Norway is exploring the possibility of offering an MBDPB, while the United Kingdom is designing a digital pound. Although the Bank of England has not yet decided whether to introduce MBDPB, it has stated that it may allow citizens to keep between £10,000 and £20,000 in their digital wallets. However, the 3,000-euro holding limit in the European Union is already causing excitement among European banks, who are concerned that the high holding limit will have a negative impact on bank deposits.
According to the European Banking Federation; With a threshold of 3,000 euros, the digital euro could cause an outflow of up to 739 billion euros in bank deposits. Non-governmental organizations suggest that the low limits will make it more difficult to use the digital currency instead of a bank account to pay rent or receive a salary. European banks have called for a comprehensive assessment of the impact of infrastructure and implementation costs, as well as the potential implications of the digital euro on financial stability and existing retail banking business models. [3]
Researcher Apostolos Thomadakis also underlined that it is necessary to evaluate whether the facilities owned in Europe are sufficient and whether the digital euro can be based on the market infrastructures already in Europe.
The Eurosystem proposes to charge payment service providers to cover the costs of issuing digital euros. However, for distribution services, it will bear the costs itself. There are also concerns about users’ privacy. Although it is emphasized that anonymous payments can be made for small amounts, but measures should be taken for large amounts, it remains unclear who will bear the costs.
ECB President Christine Lagarde stated that the digital euro could be launched by the end of 2027 at the earliest and emphasized that this process should be accelerated. Lagarde said that technical studies are ongoing and that a legal framework should be established. Member states and the European Parliament need to set out their positions and agree on final legislation. The ECB will continue the preparatory phase, which will last until November 2025. Presidents of national central banks and six members of the ECB’s Executive Board are required to decide whether to issue a digital euro. Lagarde emphasized that the project should be ambitious and that it could be the currency of the future.[4]
The European Union is taking important steps towards developing the digital euro in order to keep pace with the financial and technological transformation of the 21st century. The digital euro can be described as a digital form of traditional banknotes and coins and is managed by the ECB.
The digital euro can be used through digital wallets as an asset that has no physical equivalent. This digital currency is recorded in a digital ledger that is controlled and managed by the central bank. Users can use digital euros to process payments, make money transfers, and complete other financial transactions.
Potential benefits of a digital euro may include:
- Financial Inclusion and Usability: The digital euro can be presented in a way that is easily accessible to everyone. This, in turn, can increase financial distribution.
- Cost and Efficiency: Being in electronic form can reduce transaction costs and increase the speed of payments.
- Monetary Policy Tools: It can offer new monetary policy tools for central banks, for example, providing more effective mechanisms for managing interest rates.
- Privacy and Security: Security measures powered by cryptographic technologies can protect users’ privacy.
It is also important to consider the potential risks of the digital euro. For example, risks such as cybersecurity threats, data privacy concerns, and potential impacts on financial stability may arise.
By assessing the opportunities and risks that the digital euro can provide, the European Central Bank aims to promote the adoption of this technology in the public and private sectors. The digital euro is expected to modernize Europe’s financial infrastructure and increase its competitiveness in the global economy.
In conclusion, the digital euro represents a significant transformation in the monetary policy and financial system of the European Union. This new digital currency could be an important tool for adapting to technology-driven economic developments and providing greater access to financial services. However, it is inevitable to take into account the potential difficulties that may be encountered in the implementation process.
[1] “Deciphering the digital euro: this is how the new European virtual currency will work”, Euronews, https://es.euronews.com/business/2024/07/10/descifrando-el-euro-digital-asi-funcionara-la-nueva-moneda-virtual-europea, (Date of Access:10.07.2024).
[2] Ibid.
[3] Ibid.
[4] Ibid.
