The continuous move towards the digital world affects many different aspects of our lives, one of which is how we make payments. More and more people use card payments and its alternative methods due to safety and comfort. However, cash payments are still considered popular in many European countries for in-person payments. To find an alternative secure way for cash payments, the European Central Bank (ECB) raised an idea to create a digital Euro.
What is digital Euro?
The digital Euro is a form of currency issued by the Central Bank for public use, functioning just like cash but in a digital format. In 2021 the Governing Council of the ECB launched an investigation of the possibility to have digital money. Even though cryptocurrency is already considered digital money whose value can be connected to the US dollar or Euro, it is known to be highly volatile and not backed by the ECB. Creating a digital Euro would allow consumers to be more independent from their banks. Bank failures today can lead to significant financial problems, making it crucial to find a way to have a digital and bank-independent currency as a safe preparation for uncertain times.
Another advantage of the digital Euro is its role as a backup payment option in situations where card payments are unavailable, such as in cases of payment system failures, i.e., if the digital Euro is not also dependent on the same system. Having an option to pay in digital Euros would help maintain access to simple, universally accepted, and secure payment methods. Statistics indicate that the use of cash payments is decreasing, primarily due to the availability of more convenient alternatives such as card payments and other options like smartphone-based transactions. However, during times of crisis, people often tend to resort to withdrawing cash.
Uncertain future of digital currency
If the digital Euro idea is implemented in the future, it could offer people a wider range of payment options to choose from. However, such implementation also raises numerous questions and concerns. Who will build and administrate the technology? How secure will it be? How will people embrace its usage? Will it supplant traditional bank and card payments? Will the consumer or merchant have to provide proof of the legality of the usage? While the primary focus will revolve around the costs, the crucial questions arise: who will develop the digital Euro systems, and who will bear the financial responsibility?
Like any digital currency, the digital Euro also requires a convenient infrastructure for implementation. For easy use and availability at any moment, it is considered that the digital Euro will be held in some type of digital wallet. It is currently unknown whether it will be included in other wallets, such as Apple Pay or Google Pay. It has been stated that there will be a requirement for all merchants currently accepting Debit cards to also accept the digital Euro as a form of payment. If its technology needs to be incorporated into the POS terminals, it implies that all POS terminals will require upgrades or replacements. This change would be costly and there is no guarantee that merchants will be willing to bear these expenses. Because of that, there have been suggestions of implementing a fee for merchants to cover the costs associated with developing and operating secure digital systems capable of handling funds, because these systems can be quite expensive to develop or maintain.
“As the digital Euro should not bear any costs for the consumer, a part of these merchant fees will be channeled to the service provider of the consumer. Thereby the ECB is creating a new type of interchange fee, similar to what the card schemes have been using for the same purpose,” says the PAYSTRAX’s CEO Johannes Kolbeinsson. “In the end, digital Euro project may become similar to a new type of card scheme. Then the biggest question will be, will the ECB be able to create a digital Euro system with the required security and efficiencies so that it will be able to compete with the card schemes? And if not, will all merchants still be forced to pay for the digital Euro system, even if more costly than other payment methods, in the name of universal acceptance? Or will the ECB fund the systems through other means or taxes?”
Digital Euro usage and limitations
Because the digital Euro is a form of cash, there are also questions related to the similarities and differences in its usage. Currently, there are no significant limitations or hindrances to cash usage, but will there be any limitations on the use of the digital Euro? Right now, there are no solid decisions made regarding the amount of digital Euro that one person will be able to hold. There are various outside factors influencing the decision but in 2022 Fabio Panetta, ECB Executive Board Member, stated that according to preliminary analysis, one person will be able to have from 3,000 to 4,000 digital Euros. Even though some banks propose to expand the limits, it would create an option for some people to drop the commercial banks at all which would have a bigger impact on banks.
Current phase
The current phase of the digital Euro project is determining how it will be accessed and used by the public. It’s not only about the technical side of it but also holding a focus group for testing and finding out the needs of the users. After the project will be fully created and tested, ECB will decide, whether a digital Euro can become a reality. But as for now, there are more questions than answers.
