The public consultations for the issue of the digital euro, a currency offered in digital form by the European Central Bank (ECB) to enable citizens and businesses to make their retail payments, started on 12 October.
The idea is to introduce a form of money complementary to the current one that can support the digitisation of the European economy, while also providing an alternative to foreign digital means of payment that could potentially undermine financial stability and monetary sovereignty in the euro area.
Although cash is still the main means of payment, it is clear that, as European Central Bank President Christine Lagarde recalled, “Europeans are increasingly turning to digital in the ways they spend, save and invest”, especially after the Covid-19 crisis. This is why we need to broaden our horizons and create solutions that ensure a certain degree of citizen confidence.
The Report on a digital euro analyses the main scenarios that would justify the issuance of a digital currency. It seeks to assess the effects on the Eurosystem, the related requirements and legal aspects of the digital euro. The content of the analysis, however, excludes issues related to its establishment or management costs.
While the benefits are clear, the risks involved should not be underestimated. First and foremost, there is no doubt that citizens may weaken retail banks in the euro area by making sudden and large currency shifts, especially in times of crisis, from bank deposits to the digital euro. In addition, cyber threats could make such a tool vulnerable and highly secure solutions will need to be explored to ensure the use of digital services.
The question therefore arises: could this digital currency have the same nature as a cryptocurrency?
The digital euro would remain under the responsibility of the Central Bank to ensure that the value of the instruments it issues remains unchanged over time. This means that the value of the euro in the form of cash would be the same as that of the digital euro. On the contrary, the main feature of cryptocurrencies is precisely that they have no responsible institution, therefore no intermediaries and no coins or banknotes, as all payment units are exclusively digital. In many cases there is no reliable framework of reference, their value is extremely variable and, as a consequence, it is impossible to protect the holders.
Whatever the technology used for the digital euro, which could also be the typical blockchain of cryptography, its nature will be quite different.
However, the project is still in the study phase and it will be only from mid-2021 that the ECB will decide on whether to actually field it.
DIGITAL FINANCE PACKAGE
While it is true that a European digital currency is still far from reality, the new digital finance package adopted by the European Commission is more concrete. It includes a digital finance strategy, as well as legislative proposals on crypto-assets and digital resilience. The overall objective is, again, to give consumers more decision-making space and more opportunities in the choice of financial services and modern payment systems. These measures would allow for the development of new schemes to offer funding for European companies. It would also play a key role in implementing the European Green Deal and the Industrial Strategy for Europe. Finally, standards would be made safer and risks related to consumer protection, money laundering and cybercrime would be mitigated.
In particular, the Digital Finance Strategy aims to reduce the fragmentation of the digital single market and ensure that European standards are adapted to the information age. Consequently, consumers would have access to financial products across borders and financial technology start-ups could expand and grow.
The retail payments strategy for the EU basically aims at achieving a fully integrated system within the EU to facilitate the immediate execution of cross-border payment transactions by consumers.
The legislative proposal on crypto assets aims to stimulate innovation and protect investors from risks through clear rules for issuers and providers of crypto-activities.
Finally, the legislative proposal for an EU regulatory framework on digital operational resilience will primarily ensure that all participants in the financial system enjoy the necessary safeguards to mitigate cyberattacks and other risks.
The importance of the adoption of this package by the European Commission is confirmed by the Executive Vice-President for a People’s Economy, Valdis Dombrovskis, who affirmed:”The future of finance is digital. During the lockdown, many people shifted to accessing banking and other financial services online. Many more made contactless payments. Developing better financial products for consumers and opening new funding channels for companies will all help the recovery. But digital transformation does not come without risks. So we are making sure to protect consumers while promoting innovation”.
