‘Trusted, accessible, and easy to use’ were the words UK Chancellor, Jeremy Hunt, used to describe the benefits of the digital pound, or ‘Britcoin’ – the new virtual currency the Bank of England is considering introducing to the UK. By Johannes Kolbeinsson (pictured) , CEO and co-founder of PAYSTRAX
While it may be some time before we see its adoption, across the channel, the European Central Bank (ECB) is moving now into its ‘preparation stage’ for its own digital Euro, aiming to become the first of the G7 central banks to introduce a digital currency.
The move is part of a global trend of countries developing centralised digital currencies, with more than 100 national governments globally considering similar plans.
However, with 65% of people in a Bank of Spain report saying that they wouldn’t use a digital euro, many are still far off being convinced that the ECB can achieve its goals of providing a secure, private, and accessible digital currency.
What is the digital euro?
A central bank digital currency (CBDC), such as the digital euro, would function as a digital asset that represents the physical form of the currency. In development with the ECB, the intention is to modernise the Euro’s financial structures while retaining the security of a currency backed by a central bank.
This direct guarantee from the bank differentiates a CBDC from other digital formats, such as cryptocurrencies. In theory, this would also ease concerns that have been highlighted in recent months surrounding the viability and security of digital financial systems, as the digital euro would always keep the same value as physical cash.
Although there are doubts around the general appetite for using the currency, the ECB describes the need for a digital euro as having emerged from the increasingly digital age. It notes that in 2021, 240 trillion euros worth of electronic payments were made – a significant increase from the 184.2 trillion made four years earlier.
In practical terms, a digital euro would simply function as an online wallet or bank account, except it is both free to use and guaranteed by a public bank, rather than a private company. Customers would be able to use it in-store or online to make payments, pay bills, or send money to other accounts, providing the same convenience they enjoy today.
The stumbling bloc
But as another form of financial centralisation, the digital euro faces the considerable issue of both private and public sector trust when dealing with its implementation. Indeed, public perception and trust are perhaps the largest barriers to the digital euro, with 60% of Germans concerned that the implementation of the digital euro is the first step towards the abolition of money.
Widespread scepticism of governments monitoring financial payments, fueled by stories on China’s ‘digital yuan’, is also playing a part in the worries regarding the implementation of a CBDC. With inflation remaining high and recessionary concerns still lingering, trust in banks is low as it is right now, and the general public would be highly adverse to having their spending data viewed, even if it is only for internal use.
The plans have also raised concerns around accessibility and digital exclusion. While the ECB plans to roll out a detailed support system for the disabled and elderly through public entities such as post offices, there are real concerns that such a drastic revolution will leave behind those who still rely on cash.
Another fear is that the potential loss of deposits currently held in customer accounts could cause an easier run on the banks should a crisis occur. Over in the UK, there is real concern that 20% of all deposits could be pulled at any given moment if there is no cap on how much money digital wallets can hold, leading to the ECB proposing a €3,000 cap on digital wallets.
Plus, after having spent decades opposing such systems, current plans for the digital Euro look likely to adopt an interchange system, similar to the one used for card schemes. Although this would be beneficial by not having to charge the consumer directly for using the digital Euro for payments, it is somewhat ironic that we’ve come full circle.
The future of European payments?
While a well-implemented digital euro could offer consumers a streamlined digital payment system, there are growing doubts about whether the technology will succeed in its aim of delivering a modern currency solution.
With a decades-long head start, it’s difficult to see the system beating the level of innovation offered by the private sector. Additionally, the challenges of digital exclusion, banking responsibility, and public trust are constant topics of discussion in the CBDC’s potential introduction.
Yet if nothing else, the plans around this multi-year project certainly show the level of ambition and innovation that the fintech market offers today. If plans for the digital euro do go ahead, it will put the ECB at the forefront of the G7 central banks – maybe even the world.