The European Central Bank is working on a new form of payment. What that could mean for consumers and banks.
The European Central Bank (ECB) is considering introducing the digital euro. That would be cash that you can’t touch. Maybe in five years everyone will have an additional account with their bank. The FR explains what the digital euro is all about.
Why is the ECB doing this?
The most recognized means of payment are the currencies issued by states. In Europe, this is the job of the ECB. It controls the euro – the only legal tender in the euro states. But the state monopoly on currency is not unchallenged. For several years, Facebook has been working on private money, which the Internet company calls “Diem”. In addition, there are Bitcoin and hundreds of other digital projects that offer money-like means of payment, asset storage and speculative means. The Chinese national bank is also testing a digital currency. An estimated 65 central banks around the world are dealing with the topic.
What disadvantages does the ECB see?
The values of Bitcoin and similar units often fluctuate extremely. One of the reasons for this is that the amount of money in circulation and the value of private currencies are not controlled by state monetary and interest rate policies. Nevertheless, they could undermine the euro in the future because more people use digital means of payment. The Chinese digital currency also has the potential to weaken the position of the euro in international financial transactions. If, on the other hand, the ECB itself issued a digital version, it would secure its influence. “The central bank wants to preserve state sovereignty over money,” says Katarina Adam from the University of Applied Sciences (HTW) in Berlin. Jonas Groß from the Frankfurt School, a private business school, gives another reason: “Because the importance of cash is declining, the central bank wants to establish a digital alternative.” . ”
What is a digital euro?
The digital euro would be an additional form of cash for the Internet, as stable in value and legally protected as conventional cash. It is central bank money that only the central bank creates. This is the main difference to the so-called deposit money in the bank accounts, which the private banks create through their lending. The digital euro comes directly from the central bank.
What should one be able to use digital euros for?
To pay on the Internet. In some cases, transfers should be cheaper and faster than conventional bookings. Because technically, payments in digital euros can take place decentrally, directly between sender: in and recipient: in – without detours via other banks, payment service providers or billing companies.
How do digital payment methods work?
You can still pick up cash today. The current account at the bank is now also managed by computer, just like the transfers to other accounts are processed digitally. The bookings are saved on the central computers of the institutes that guarantee the payments. This is different to the new, digital means of payment. Their booking processes are not only documented in a few data centers, but also decentrally on millions of computers worldwide. The underlying technology is therefore called “Distributed Ledger”. One variant is blockchain technology, which is used in Bitcoin, among other things. The simultaneous storage in many memories is considered a new way to make the bookings relatively forgery-proof.
Do they all have an additional account at the bank?
Yes. You could transfer a maximum of 3000 euros from the current account to this. The limit, which has not yet been decided, is intended to prevent too much funds from being withdrawn from the commercial banks. Because “for every amount of deposit that is transferred from a current account to a digital euro account, for example, the institution concerned has to deposit the same amount with the central bank,” explains Groß.
Then what else do you need the institutes for?
“If digital central bank money is introduced for everyone, banks will not be necessary, for example, to process payments with this digital money,” says Markus Demary from the Institute for the German Economy in Cologne (IW). Because the bookings are stored on a large number of decentralized computers, the bank is actually no longer needed as an intermediary institution. Digital currencies therefore represent an attack on the business model of the institutes. In addition to the digital euro, however, electronically transferable bank deposits will continue to exist. The institutes can thus continue to perform other tasks in the future, such as “granting loans and checking the creditworthiness of creditors,” Demary said.
Will this abolish the anonymity of payment?
If you have withdrawn cash from your own account using an ATM or till today, you can no longer follow the further path of the notes and coins. Many people in Germany feel comfortable with this anonymity of payment, because they want to give private and government monitors as little information as possible. Even with digital money, anonymity is technically possible in principle, but difficult to implement and therefore expensive. In reality, the so-called pseudonymization will be more likely to be encountered – an encryption on the surface that nevertheless enables experts to decipher the sender: in and recipient: in of payments. The ECB is considering allowing anonymized payment transactions for small amounts of up to perhaps 20 euros.
Another step in eliminating cash?
The digital euro “does not replace cash, but complements it,” says the ECB. It will “also ensure in the future that the euro banknotes and coins are available everywhere in the euro area.” How many decades this statement will still be valid, however, has to be seen.
“In mid-2021 we will decide whether to start a project with which we can prepare for the possible future issue of a digital euro,” says the central bank.