What is the digital euro?

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The pandemic has meant a leap forward towards digitization in all areas of life and the economy, including the monetary one. Different governments around the world are working on formulas to digitize their means of payments and, incidentally, dealing with cryptocurrencies. The solution of the European Union (EU) and the European Central Bank (ECB) has its own name: digital euro.

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What is the digital euro and why is it necessary?

The digital euro is not a new currency, not even a crypto asset, no matter how much you can use the technology blockchain, something that is yet to be determined.

Today, the digital euro is just an ECB project in its early stages. With this initiative, the ECB intends create an electronic version of the euro, that it would continue to be legal tender and guaranteed by the official body. In other words, a response to alternative means of payment outside the traditional monetary system.

The trend towards digitization has led to the emergence of digital payment methods such as PayPal or Bizum, which allow immediate transfers between banks, and other alternatives such as cryptocurrencies, which operate outside the system and allow anonymous and non-traceable transactions.

It is precisely these virtual currencies and the range of possibilities that open up one of the issues that worries the ECB. What would happen if a project such as Facebook’s virtual currency had a breakthrough and its more than 2 billion users around the world began to use it? In other words, What if a significant part of Europeans stop using the euro and switch to digital currencies?

On the one hand, it would reduce the strength of the ECB and the effectiveness of its monetary policies. For another, that monetary influence would remain in private hands.

That is one of the reasons for the creation of the digital euro, a solution to the growing monetary digitization. Another reason is that, in an environment of reduced use of physical money, people less familiar with technology and unbanked groups and countries would be at risk of exclusion.

To this must be added that if the cash is no longer in general use, printing and distributing it may not be economically feasible.

Differences between the digital euro and cash

The objective of the ECB is that that digital euro is simply the digital equivalent of cash. As simple as that. It is not an instrument to end cash, but to provide the system with an alternative means of payment, an electronic money that continues to be managed and managed by the monetary authority.

The ECB itself recalls that “a digital euro would continue to be a euro, it would be an electronic form of money issued by the Eurosystem (the ECB and the national central banks) that all citizens and companies could use —like banknotes, but in a format digital-“. That is why they emphasize that “it will not replace cash, but rather complement it.”

In addition, it would help improve bank inclusion. Thanks to it, a deposit can be opened directly with the ECB, outside the banking system, as digital currencies do. From the entity they assure that thanks to him citizens will be able to carry out their operations “in a fast, easy and safe way”.

How does the digital euro work?

The digital euro project is in such an embryonic phase that it really it is not very clear how it will work. In fact, the technology you will use is not even defined, which does not have to be the blockchain of most cryptocurrencies. What exists for now, according to the ECB itself, is a possible functional design, little else.

In fact, there are still doubts on such important issues as how the digital euro will be accessed; or if the same type of deposit facility that banks enjoy will be applied to citizens’ accounts in digital euros.

When will the digital euro be available?

The final decision on the digital euro will be made in the middle of this year and your implantation process could take between 4 or 5 years. In other words, there is still a long way to go.

For starters, once it has decided how to proceed, the ECB would spend the next 18 months defining the operational framework and the technical solution to use. From there, the implementation phase would begin, as long as there are no modifications.

Electronic money under examination: advantages and disadvantages of the digital euro

Again, from the ECB they insist that the digital euro is not a substitute for physical money. It is a way of complementing the current monetary system to adapt to digitization and new means of payment. In his own words: “it would avoid dependence on digital means of payment issued and controlled from outside the euro area, which could compromise financial stability and monetary sovereignty.”

Along these lines, they have also stressed that it is not a crypto asset, because “crypto assets are not central bank money. They differ from this in that their prices are volatile because they do not have intrinsic value nor are they backed by any reliable institution. Citizens will be able to trust a digital euro as much as cash, since both have the backing of a central bank ”.

From this point of view, everything would be advantages on the part of the digital euro. And the risks? The most imminent would be the impact on the banking sector. If citizens can open a deposit or an account with the ECB itself, the role of classical financial intermediaries could be in question, with all that that implies.

And the reality is that the ECB cannot and does not want to assume that role. In fact, the first measure that has been proposed is limit the amount of deposits with the ECB to € 3,000 to avoid a massive transfer of money in bank accounts to the digital euro at the ECB.

As with any other change of this magnitude, such as the introduction of the euro itself at the turn of the century, there is a long way to go. The difference in this case is that Europe is not alone. There are other countries that work in their own digital currencies, so there will be multiple solutions to learn from.

In Naranja I Bitcoin and cryptocurrencies what are they and how do they work?
Image | Maryna Yazbeck

European Central Bank, bitcoin, digitization, Means of payment

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