Expert: Digital euro ‘not clear yet and might not be for a long time’

The digital euro would essentially be an electronic version of euro notes and coins, which will be safely stored directly on an ECB account rather than at a commercial bank. [Novikov Aleksey/Shutterstock]

As the digital euro moves to the experimentation phase, experts criticise the lack of clarity around the project and the decade long delay compared to cryptocurrencies.

The Governing Council of the European Central Bank (ECB) decided last week (July 14) to move to the investigation phase for its digital euro, a 24-month-long phase intended to “address key issues regarding design and distribution.”

“But the outcome is not clear yet and might not be for a long time,” Hugo Coelho, former advisor to Eurogroup President Mario Centeno and partner at Forefront, told EURACTIV.

“For the moment the digital euro remains flagrantly ill-defined,” he added, explaining that “it might well be the case that the first version of the digital euro will feel like a prepaid card of sorts and make little difference to our day-to-day lives, but it could change gradually.”

The digital euro would essentially be an electronic version of euro notes and coins, which will be safely stored directly on an ECB account rather than at a commercial bank. For the ECB, it is meant to become an additional payment solution and will not aim at replacing cash.

The digital euro is expected to be safer compared to the private sector banking system, as there is always the remote possibility banks might become insolvent.

“In the collective mind, the ECB is the ultimate guarantee,” Netinvestissement co-founder Karl Toussaint du Wast told EURACTIV.

The service would also be free, since the payments would be made by an ECB-issued card or through a smart phone.

“It has been nine months since we published our report on a digital euro. In that time, we have carried out further analysis, sought input from citizens and professionals, and conducted some experiments, with encouraging results. All of this has led us to decide to move up a gear and start the digital euro project,” said ECB President Christine Lagarde in a statement.

Different enemies

“This is a desperate and hopeless move,” Toussaint du Wast said. “The ECB has lost the game,” he added, with “the innovation and growth power of projects developed on blockchain, including cryptos, having been 10 years ahead.”

The ECB, however, does not admit to defeat and wants to keep its grip on currency sovereignty. Toussaint du Wast said stablecoins – cryptocurrencies that replicate the dollar or the euro for instance – are the first enemy to the “e-euro.” In particular, it will be coming after Facebook’s Diem, formerly known as Libra.

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The “second enemy” for the European bid to become the front runner in developing a virtual, state-backed currency is the digital yuan, the trial of which in China has reached $5.3 billion in transactions.

The e-euro could be the answer to a cryptocurrency that threatens to substitute the euro in payments. In that sense, it would help protect the capacity of the ECB to keep inflation under control, Coelho noted.

The role of banks

Experts say that if the digital euro is too successful, it risks undermining the banking system by eroding bank deposits. The ECB said it will try to limit this phenomenon by capping or disincentivising the use of digital euros over a certain amount.

“Cutting banks out of the system in any significant way by incentivising people to replace their bank accounts with accounts in the central bank would face fierce opposition from many governments, not to mention from the industry,” said Coelho.

“The digital euro will probably be designed in a way that protects the role of banks in attracting deposits and extending credit to European companies,” he added.

Karl Toussaint du Wast showed less optimism: “The traditional banking system is irrevocably bound to die for the mainstream users. The bank as we imagine it today will have disappeared in 10 years.”

Privacy as the main concern

Privacy was also identified during the ECB consultation as the main concern for future e-euro users, while cryptocurrencies are often accused to be used for illicit activities.

“This is going to be a balancing act,” explained Coelho. “Judging by the ECB preparatory work, some transactions will be concluded without registering the identity of payers and payees. But this will be limited or selective so that some illegal transactions can be traced”, he said.

However, that will not be the digital euro’s main competitive advantage, according to Toussaint du Wast, who said the “protection of data whether they are supervised by a private actor or the ECB is exactly the same.”

One advantage found is the comparatively climate friendly impact. Experiments led by ECB found, however, that a digital euro core infrastructure would be environmentally friendly, whereas cryptocurrencies have been strongly criticised for their environmental impact.

Digital euro’s ‘moment of truth’ to come in April

The European Central Bank will decide in spring, most likely in April, whether to move ahead with the preparatory work to launch a digital euro, a complex project that would facilitate payments but could also shake the foundations of the financial system.

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