Thomas GretherBack in October 2020, the European Central Bank (ECB) published a basic paper on the subject of the digital euro. This refers to the construction of a completely new form of money. In the future, the euro will no longer be available only as hard or paper money, but also in purely digital form.
Survey on the euro digital currency
As a next step, the ECB conducted digital surveys among private individuals in April 2021 to check the acceptance of a digital currency among broad sections of the population. With the following result:
- 43 percent of all participants consider the data protection of the euro digital currency important.
- 18 percent see the advantages in security.
- 11 percent of all participants consider it important to be able to pay with digital money throughout the euro area.
- 9 percent reject additional costs associated with the currency.
- 8 percent would also like to benefit from offline usability.
Abolition of euro cash is not an issue
According to statements by the ECB, however, there is currently no talk of abolishing the current cash system. Rather, as an EU citizen, you will get your own wallet for storing central bank money in the future. Unlike bank or credit cards, however, all merchants in the EU area would have to accept the digital euros in the future. Thus, the digital euro is a practical addition to the existing cash or giro money (book money).
Differences between digital euros and cash
Money that we carry in our wallets is also known as cash. It is freely available to you as a consumer. The money in your checking account or savings book, on the other hand, is called book or giro money. If the bank in question goes bankrupt, you get the money back from the ECB. Digital euros now refers to all money that is in digital form. It just can’t be stolen, as might be the case with your wallet.
Reasons for introducing the digital euro
Countering potential pickpockets is not the ECB’s main reason for developing the digital euro. Below, we list the main reasons why the ECB wants to develop the digital euro in the first place:
- The use of cash is steadily declining due to increasing Internet commerce.
- Digital payment methods and online banking are popular with consumers.
- Currently, only around 20 percent of the total money supply is in the form of physical cash.
- The danger of cryptocurrencies taking over the monetary system is looming.
- Mitigate money laundering, terrorist financing, counterfeiting, crime and fraud.
- Increasing the security of physical cash.
Paying with the app. ECB in Frankfurt.
From when on shopping with digital euros?
Currently, the ECB is lagging well behind the U.S. Federal Reserve Bank (FED) in digital money. Originally, the launch of the digital euro was set for 2022, but this seems unrealistic as things stand.
“The establishment of a corresponding infrastructure for the digital euro is not to be expected before 2026,” Prof. Dr. Philip Sandner of the Frankfurt School of Finance & Management explained to the media. The digital euro is in a test phase – they are testing the underlying technology. Patrick Hansen of the German Association for Information Technology, Telecommunications and New Media (Bitkom) also expects a delay. “I think it is quite unlikely that the digital euro will be available to all citizens in the euro zone as early as 2022,” Hansen told the press.
Where can I pay with the digital euro?
Once it is introduced, consumers will be able to pay with the digital euro in the same way as with euro coins and bills, for example. However, the digital euro is not a coin and is not issued in any other physical form. The digital euro is a purely virtual construct. There is a special account for the digital euro, a wallet, which is still being planned. You can access the wallet via app when shopping with your smartphone. When paying with the digital euro, the corresponding amount is then debited directly from your wallet.
Euro transactions in real time
Thus, transactions happen in real time. This also eliminates the need to wait for incoming payments or debits in the future. You can replenish your individual “digital euro account” at any time as you wish. Payments can then be made in all retail outlets, supermarkets, public offices, and event and restaurant venues.
Digital Swiss franc in the pipeline
In addition to the ECB, the Swiss National Bank (SNB) is also working on its own digital currency together with the French Banque de France. This is said to be the e-franc. Unlike the digital euro, however, the e-franc can be used primarily for credit transactions between commercial banks in Switzerland and abroad. The "Helvetia" project will thus primarily advance the tokenization of assets for potential financial intermediaries.
How does the payment work?
The question is how to pay with the new digital currency in business. To do so, you simply hold your own smartphone up to the corresponding payment terminal – and the transaction is completed! The payment process is the same as with checking or credit cards, for example. The only difference is that the system accesses the wallet and not a checking or credit card account. For the payment systems that can be used later, the ECB sometimes tests two different variants:
- Target Instant Payment Settlement (TIPS). Real-time money transfers are possible.
- The Distributed Ledger System via the Blockchain (also in use for cryptocurrencies). The advantages are security and expected low transaction costs.
What are the advantages for consumers?
Consumers primarily benefit from greater security with the digital euro. Currently, the European deposit guarantee amounts to 100,000 euros per investor. Assets above this limit that are invested in giro money (i.e. in checking accounts or savings books) can suffer a total loss. This is likely to be different with the digital euro, should fraud or bankruptcy occur at a bank. The ECB also wants to repay assets above the magic 100,000 euro mark in the form of digital euros.
Conclusion on the digital euro
In its current phase of development, the digital euro is still in its infancy. At the same time, a promising concept is crystallizing that other national and central banks are already using. In China, for example, the e-yuan will be fully operational from 2022. However, many details in the technical implementation of the digital euro have not yet been resolved. And time is pressing! The ECB is feeling more and more pressure due to the advancing solutions in the field of cryptocurrencies. Therefore, the establishment of a European digital currency can be expected in the next few years in any case.
FAQ – Frequently Asked Questions
The digital euro basically works like regular money in a checking account. But you don’t pay with coins, banknotes or a checking or credit card, but with a smartphone app. This app is linked to an individual wallet. This debits the digital euro directly from your wallet.
When the digital euro is ready for use in a few years, you will need your own central bank account. On this you can receive digital euros or use them for your own purchases. It will be a kind of wallet that you can use to make purchases anytime, anywhere. The ECB plans to involve commercial banks in setting up the individual central bank accounts.
Quite clearly, no. At present, cash and central bank money account for around 20 percent of the total money supply. This means that all three monetary models (i.e., cash, scriptural money and the new central bank money) continue to exist side by side. There is therefore no danger to your individual cash holdings.
