Summary: The European Central Bank (ECB) is developing the Digital Euro, a secure and reliable electronic form of cash designed to complement physical currency. It aims to provide a free, inclusive, and pan-European payment option for individuals and businesses, accessible both online and offline. The Digital Euro promises enhanced privacy for transactions and aims to address the needs of unbanked or digitally challenged individuals while fostering innovation among high-net-worth users. Merchants will benefit from reduced payment processing costs and a streamlined, unified payments system across the euro area. Supervised intermediaries, like banks, will play a key role in distributing and managing the Digital Euro, offering services like loyalty programs and conditional payments. The ECB is also exploring advanced technologies, including blockchain, for its implementation. Legislative proposals are underway to establish a legal framework for the Digital Euro. Studies reveal its potential to reshape bank balance sheets and funding sources but highlight the need to limit household adoption to under €3,000 per person to avoid financial instability. Globally, the ECB looks to inspire other central banks to adopt similar systems, facilitating transactions for travelers and foreign businesses. Comparable initiatives, such as India’s e₹-R pilot, underscore the growing global shift towards digital currencies. As digital payments gain traction, the Digital Euro represents a significant step in modernizing Europe’s monetary ecosystem.
Nearly 55% of Europeans want to have the usage of online currency like digital euro, which would be a digital form of cash, issued by the central bank and obviously available to every one in the euro area. European Central Bank is working with other National Central banks to work on a digital form of cash. It is time to learn about the details of Digital Euro.
Many frequently asked questions and their relevant answers are as under.
1. What is the need to have a Digital Euro?
Digitalization is changing the way one pays on online or offline with cash. The usage of cash which can be stolen at any time is declining and the shift towards on line shopping or digital payments has overtaken all by no surprise.
Yes, Digital Euro will be an electronic cash which is safe, reliable, and can easily be used complementing banknotes and coins.
You may say, it has caught up with the nations like India which has overtaken the whole world with the maximum usage of digital means of payment.
2. Why would the people opt to use Digital Euro?
Aiming to be the number one digital means of payment which the consumers use free of charge in shops, online or from person to person. Interestingly, it is trying to be available online and offline. The digital euro would accommodate the needs of people with disabilities and those with no access to a bank account or lacking digital or financial skills while the highly skilled and high net worth ones would prefer it for faster payments.
3. The natural logical next question is around its likelihood of replacing the cash?
Expected to complement rather than replacing the cash, or other private means of payments available like wallets.
4. What value would the digital euro offer merchants?
As a truly pan-European solution, it will be accepted throughout the euro area, and could provide an easier and cheaper alternative to the currently fragmented payments landscape in which the merchants work. They would also get a better value from the payment solution providers and reduce their costs.
5. What about intermediaries like the banks?
Supervised intermediaries like the banks would pay the pivotal role in distributing the digital euro. They would be easily available throughout the euro area to act as the main point of contact for individuals, merchants, and businesses for all digital euro-related issues and would definitely perform the end-user services. It would immediately increase their customer base, and develop value-added services within their offer (e.g. conditional payments or loyalty programmes), fostering innovation and competition in the digital payment markets across the euro area.
6. Interesting, but how would the digital euro work in real monetary world?
Once you fill up your bank wallet with the digital euro with a bank account or depositing the cash, you can start making payments using the digital euro in your wallet.
7. Who would be able to use the digital euro?
To quote from the ECB website,” As stated in the legislative proposal presented by the European Commission, the digital euro would be made available to people, businesses and public entities that reside or are established in a euro area Member State on a temporary or permanent basis.
People who travel to the euro area for personal or professional purposes, or who used to reside or be established in a euro area country, may also have access to the digital euro.”
8. Let’s talk about those situated outside the Euro area?
The role of European Central Bank comes into this place. It is expected that it would take a lead role to motivate other central banks to look at the digital euro as a reliable and the most useful medium for commercially dealing with European banks by opening their accounts, or other payment service providers. Even the tourists, importers of other countries, and other casual visitors will be encouraged to use the digital euro which will increase the services of the European banks. Those carrying other currencies will be able to convert them into digital euro for wide varieties of use.
9. What about the privacy, the most insecure element of any dealing online with hackers from various countries paying havoc with the online customers?
Let us analyse this in two ways. First online – Privacy will be implemented in such a way that the Euro system itself – the issuer and payment infrastructure provider – would not be able to directly connect transactions to specific individuals.
Now the offline transactions – The digital euro will offer the users a cash- like level of privacy, both for sending the money to other people and for paying in shops. Only the payer and the payee would be able to know the personal transaction details of the payments made.
10. Will the ECB ensure the digital euro is inclusive?
The digital euro will be a public good like banknotes and coins as they exist today but in a digital form. Being free for the basic usage, it will work through the mobile app or a physical card or online who want to use it. It also works for users with limited connectivity.
11. Uniform way of work for digital euro- who would ensure it?
Supervised intermediaries like euro area banks would be responsible distributing of the digital euro and digital euro rulebook with the same set of rules, standards, and procedures would be implemented by ECB and duly monitored.
12. Currently instant payments are not received by merchants but a delay is involved. Will the euro digital change the situation?
Surely, all digital euro payments would be instant and this would change the monetary landscape in the whole Europe after proper rules are evolved and strictly implemented.
13. What about involvement of distributed ledger technology like blockchain?
It is being understood that the Euro system is experimenting with different technologies – both centralised and decentralised – in the development of the digital euro, including distributed ledger technologies. Time will tell the latest technology that would evolve the digital euro as one of the best competitors in the world.
14. What about the legislative proposal being formulated for implementing the digital euro?
From the website of ECB, we learn that “The European Commission is putting forward two proposals within a ‘single currency package’ to ensure that individuals and businesses can continue to access and pay with euro banknotes and coins across the euro area, and to set out a framework for a possible new digital form of the euro that the European Central Bank could choose to issue in the future, as a complement to cash.
The package includes a legislative proposal establishing the legal framework for a possible digital euro as a complement to euro banknotes and coins. It will ensure that people and businesses have an additional choice – on top of current private options – that allows them to pay digitally.”
15. It is now clear from the latest developments that the legislative proposal stands totally accepted. Will it impact anyway, the balance sheets of the banks and whether any special studies undertaken to know the results?
Yes, to help prevent any negative impact, scientists of the Joint Research Centre (JRC) have recently published two reports that anticipate and shed light on the potential consequences: Central bank digital currency and European banks’ balance sheets (published recently) and Bank profitability and central bank digital currency. Below, a synopsis of the research outcome.
The reports analysed the implication of a retail-only digital euro on banks’ balance sheets and profitability.
The results of the research and the different scenarios modelled acknowledged that a digital euro might divert funding flows from bank deposits. This could threaten one of the most important financial sources of banks and, especially, of smaller banks: households’ deposits.
Nevertheless, the study found that a digital euro take-up of less than 3 000 euros per household would not pose any significant risks to financial stability.
Higher demand due to a widespread adoption of the digital currency could lead to a shift in funding sources and structural changes in balance sheets (i.e. banks might have to rely on funding sources other than deposits, like increasing the usage of reserves with central bank and/or the wholesale market for funding).
With substantial developments, small banks could also face a potential decrease in profitability if demand for the digital euro reaches high levels: in a large-demand scenario, banks’ return on equity (ROE) might go down from an average value of 3.7% to 2.4%, without considering any other adjustment.
In a nutshell, the ECB feels a possible digital euro needs to be carefully designed to avoid the possible risks to the financial stability.
Now that we have a basic idea of the digital euro, let me combine it with the Indian development of the Operationalisation of Central Bank Digital Currency – Retail (e₹-R) Pilot vide its communication dated November 29, 2022 of RBI communication.
Some more facts from the RBI website.
- The pilot project would cover select locations in closed user group (CUG) comprising participating customers and merchants. The e₹-Rwould be in the form of a digital token that represents legal tender. It would be issued in the same denominations that paper currency and coins are currently issued. It would be distributed through intermediaries, i.e., banks. Users will be able to transact with e₹-R through a digital wallet offered by the participating banks and stored on mobile phones / devices.
- Transactions could be both Person to Person (P2P) and Person to Merchant (P2M). Payments to merchants would be made using QR codes displayed at merchant locations. The e₹-Rwould offer features of physical cash like trust, safety and settlement finality. As in the case of cash, it will not earn any interest and can be converted to other forms of money, like deposits with banks.
- Rather than talking theoretically, the RBI has informed that Eight banks have been identified for phase-wise participation in this pilot project. The first phase will begin with four banks, viz., State Bank of India, ICICI Bank, Yes Bank and IDFC First Bank in four cities across the country.
- Four more banks, viz., Bank of Baroda, Union Bank of India, HDFC Bank and Kotak Mahindra Bank will join this pilot subsequently. The pilot project would initially cover four cities, viz., Mumbai, New Delhi, Bengaluru and Bhubaneswar and later extend to Ahmedabad, Gangtok, Guwahati, Hyderabad, Indore, Kochi, Lucknow, Patna and Shimla. The scope of pilot may be expanded gradually to include more banks, users and locations as needed.
Conclusion
The digitalization has affected every one including myself when I paid my household items through Paytm with a wallet maintained with Kotak Mahindra Bank digitally for Rs 329, an odd figure if I were to use actual cash or the cumbersome usage of my debit/credit cards. The above information on digital currencies getting popularity in all developed/developing/underdeveloped countries indicate the enormous gains to us, the Indians who have adopted digital payments instantly with the least risk to our transactions. I could feel the pains of the people of the developed countries who need to think ahead, slowly convert the newer world of real time payments, and move forward.
Yes, the newer monetary world will belong to those who would adopt the latest technologies, experiment with them, and gain immensely. The future belongs to the nations like India whose poor have shown the way to proper.
Reference
Web sites of
European Central Bank – digital euro:
Reserve Bank of India – Central Bank Digital Currency – Retail (e₹-R)
Caution
I just enjoyed the news on digital currencies and wrote the above article. It is neither a legal advice nor a monetary consultation. Let experts guide you.
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