Smart Money: The digital euro is coming but how will it be different
from Revolut?
Cliff Taylor
The European Central Bank (ECB) has this week given the green light to
the next phase of planning for the introduction of a digital euro. Huge
technical preparations and trials are already underway and will now
accelerate. But so will the debate about whether the euro zone needs a
digital version of the single currency.
A range of digital payment systems already exist, provided by banks and
payment providers such as Visa, Mastercard and Revolut. The job for
senior politicians and central bankers is to make the case for why an
“official” digital currency is needed – one backed by the ECB itself and
thus offering the same guarantee as physical banknotes and cash.
As well as the consumer issue, the ECB and Europe’s politicians also see
the development of a euro zone payments system as a key issue for
strategic autonomy – as opposed to relying on US-controlled platforms –
and important for underpinning monetary policy. There is also the issue
of having a place on a fast-developing pitch of digital payments, where
other international central banks will also be playing.
How would a digital euro operate?
You would carry digital euros in a wallet on your smartphone – or have
an account accessible via a smart card. The service would be free and
would probably be provided by your bank. This would allow for purchases
all over the euro area, offering an alternative channel to those
currently provided by banks themselves or other payment providers.
The idea is that the digital euro “wallet” would be for transactions – a
“means of payment” in the jargon – rather than being somewhere to put
your savings. To ensure that the new service did not “poach” funds from
bank savings accounts, a limit would be put on the amount you could keep
in your digital wallet. A limit of about €3,000 had previously been
floated by the ECB but what level would be set remains open to debate.
To make the service more relevant for an increasing number of
transactions, there is an argument for increasing this figures somewhat,
though the banking sector is also warning of that cash being attracted
away from bank accounts could have an impact on the ability of banks to
lend. The limit on digital euro wallets is thus a key decision – too low
and it will put off punters, too high and it may risk attracting
significant deposits from banks.
Consumers would also be able to make what are called “offline” payments,
tranferring money to somebody else’s digital wallet, as happens
currently with services such as Revolut, and would be able use the
digital euro for online shopping. As payments technology advances, other
functionality may also emerge.
How exactly all this will operate and how it will link in with existing
bank services remains to be worked out and will be the subject of
discussions and tests, with the banking and payments sector now in the
next phase of planning, which the ECB expects could last around two
years. But banks would be likely to offer the digital euro wallet
alongside their existing regime, including the ability to transfer cash
from an existing bank account. An unanswered question is who will pay.
The digital euro will be provided free of charge, but will taxpayers
fund its development and provision?
What are the advantages for the public?
This is where the ECB and politicians have some work to do, with a
significant campaign from the euro zone’s central banks likely to get
underway on this issue. The core messages would be convenience and
safety. The digital euro, like cash, would be acceptable, by law, all
over the euro zone. And, unlike services offered by banks and payment
companies, it would carry the full guarantee of the ECB – again like
cash – and, if it is to work, a stable payment platform controlled by
the public sector, rather than private firms.
With existing smartphone and payment cards generally acceptable across
Europe, albeit not everywhere, and usually operating in a stable
fashion, the question for the public is what more the digital euro can
offer, or whether it can offer key advantages which will encourage
consumers to use it for specific things – for example travel – in tandem
with existing payment systems. This will come down to the ECB selling
its message of the advantages of using ECB-backed digital money, as well
as the technical functionality of the whole digital euro offering.
The initial driver for central banks to develop so-called CBDCs –
central bank digital currencies – was in part the threat that companies
such as Facebook would take control of important parts of the payments
system. While Facebook’s own plan never progressed, the huge move to
digital payments systems, which accelerated through the pandemic, meant
central banks have generally pushed ahead with plans to launch. The
stability of the digital euro, compared to crypto currencies, will also
be a selling point.
Why do some people oppose the digital euro?
The main objections to the digital euro rest on privacy concerns.
Campaigners warn that the ECB will have access to information on where
people spend money and some have even raised concerns about so-called
“programmable money”, in other words the central bank putting limits or
imposing rules on how or where people spend. While some of these Big
Brother concerns seem overplayed, there is no doubt that privacy is an
important issue that has caused a slowdown in draft legislation on the
issue published by the European Commission and under the direction of
financial services commissioner Mairead McGuinness.
The key point here is balancing controls against terrorism and money
laundering with the need for privacy. The ECB says it has no interest in
keeping records of where people spend. However, some backstop is needed
– as with normal banking services – to allow official access under
certain prescribed conditions. While people are often happy to share all
kinds of information with social media companies and, indirectly with
banks and payment firms, this issue of where the line is drawn with the
digital euro looks set to be a hot-button topic, not only in Europe, but
internationally.
The EU’s data protection watchdog, the European Data Protection Board,
in comments on the draft legislation, recently called for clearer and
more transparent procedures in terms of data privacy when people sign up
for their digital euro wallet. It says the public need to be happy about
how their data would be used – and anonymised. It also called for more
clarity on when authorities would be allowed access to information to
combat terrorism and money laundering. And in particular it argued that
a ceiling needs to be set for online transactions, under which the
authorities would under no circumstances be able to access information.
A €5 transaction, for example, is hardly likely to be funding terrorism
or laundering money. It has already been indicated that this will be the
case for offline transactions between two people.
When will the digital euro be launched?
The clear impression now is that the project has been slowed a bit. The
ECB has the final say and previously president Christine Lagarde had
indicated that it might be launched in 2025/26. Now the indications are
that it will more likely happen be in around five to seven years’ time.
EU commissioner McGuiness has said that the legislation is now an issue
for the next commission, which will take office next year after the
summer’s European Parliament elections. The Eurogroup of euro zone
finance ministers, chaired by Paschal Donohoe, has discussed the issue
in detail, driving the political response. But the EU’s legislative
programme will generally grind to a halt early next year in the run-up
to the elections.
While the ECB has the final say on the launch of the digital euro, it
has said that its technical work will run in tandem with the legislative
and political agenda. The signs are that the central bank sees this as a
strategic priority, but that work remains before the final decision to
launch is taken. But with the use of digital payments becoming more and
more common, the betting is that the digital euro will, sooner or later,
become a reality.
Irish Times
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