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Last week, on Holland Gold an article about the European Central Bank (ECB) which had stated that the digital euro will offer about as much privacy as cash payments. That turned out to be a bit more complicated, as we wrote in the article. As a result of the article, several readers wondered what the point of the digital euro was. At the moment, the digital euro adds little, but could it perhaps be an enrichment for the payment system in the Netherlands in the future?
Central banks have often put forward the reasons for the digital euro. A digital version of public money ensures that Money moves with the times. Currently, there is only digital money issued by commercial banks (cryptocurrencies aside), but since banks can fail, there are risks associated with digital money. At present, people rely on cash as an alternative to the bank account, but with the advent of the digital euro, there will be a public alternative.
In addition, the digital euro reduces dependency on foreign payment services. With Dutch payment services such as iDEAL, the Dutch payment system is among the best in the world, but that is not the case for all European countries. In many European countries, people are still partly dependent on foreign payment services such as PayPal, Visa and Mastercard. With the digital euro, Europe hopes to increase its strategic autonomy.
The added value of the digital euro does not seem to be too bad. First of all, the number of digital euros that can be held is limited. The exact limit has yet to be determined, but it is unlikely to exceed 3000 euros. In addition, no interest is paid on the balances held in digital euros. From an economic point of view, this makes sense; Since central banks cannot fail, there is no credit risk with the digital euro. Of course, there is the risk of loss of purchasing power due to inflation, just as is the case now.
As a result, the digital euro is for the time being only a means of payment and not a means of savings. After all, one cannot hold large sums of money and does not receive any compensation in the form of interest. Menno Broos, digital euro project leader for DNB, also indicated in a podcast with Holland Gold that the digital euro will not be a means of savings; ‘The payments market is so essential to the economy and at the same time we see that we no longer have that market in our own hands in Europe. That's why we said that the digital euro should be a payment instrument'.
It is often argued that the purchase of cash necessitates a digital euro, but this argument does not seem to hold water. In fact, the general acceptability of cash is now enshrined in law. The digital euro also does not provide any added value for payers with disabilities who have difficulty with digital payments. In addition, the digital euro is subject to a cap and no interest is paid on it. Therefore, the added value of the digital euro for Dutch payers is minimal, he said Gijs Boudewijn, director of the Dutch Payments Association, in a podcast with Holland Gold. In that conversation, Boudewijn also says that the banks are refuting the ECB's argument with the European Payments Initiative and the WERO wallet. The ECB claims that a digital euro is necessary because we are too dependent on foreign parties. But that dependency is already being reduced by the banks.
The fact that the digital euro has no added value, but does pose potential dangers, has already caused resistance. Especially the possible lack of privacy is a thorny issue. The ECB has indicated that the digital euro will provide a high degree of privacy, as account holders pseudonymised which means that the central bank cannot see personal data that could be traced back to account holders. But since there are strict rules in Europe regarding money laundering and terrorist financing, data will never be completely anonymous and the banks, which distribute the digital euro, will have access to the data. Ultimately, authorities will be able to see which payments are made with the digital currency.
Journalist Arno Wellens discussed in detail the dangers of the digital euro in a podcast with {{P3}}. According to Wellens, the digital euro could turn into a dystopian currency, with the privacy of payers increasingly at stake. He called the coin a 'vegetarian tiger' and is afraid that more and more privacy will gradually be surrendered.
But a digital euro could be capable of much more, provided that the new currency is used to its full potential. If the limit is increased, or even lifted, the digital euro could be used as a temporary Safe Harbor officiate. Today, deposits in commercial banks are guaranteed by the Deposit Guarantee Scheme (DGS). With a digital euro that has higher or no limits, the DGS can even be phased out, giving banks a real incentive to use savings responsibly again. But gold is a better alternative as a safe haven for a longer period of time, as precious metals also retain their value over a longer period of time.
The central bank could also benefit from a fully exploited digital euro. This is because the central bank can pursue much more decisive policy if interest is levied on the digital euro. This can be done, for example, by means of so-called tiered remuneration, with different brackets receiving different interest rates. As a result, savers can be better encouraged to save or spend money. We already described this in an earlier articleIt remains, of course, whether the central bank's intervention actually dampens business cycles.
The digital euro also allows transactions to be made programmable. Bee Smart Contracts the parties make agreements that are automatically checked by the system. This is the case, for example, when one company promises to deliver a product to another company. With the digital euro, it will be possible to lock in the buyer's payment as soon as the item is shipped and release the payment to the seller once the product has been received. At the same time, discounts could be granted automatically if the supplier delivers by a certain date and with the right quality, or the price could be automatically increased if the agreed date is not met. The digital euro could thus significantly reduce administrative costs for businesses.
Example of the Swedish central bank of a programmed transaction. The buyer's money is locked up and not released to the car dealer until the car is delivered in good condition. (Source: Sveriges Riksbank)
The government can also benefit from programmable transactions, it wrote OMFIF. With the help of Smart Contracts certain public funds can be allocated almost automatically. Consider, for example, subsidies for sports clubs, which can be granted automatically based on the number of members. At present, this process involves a large civil service, but a Central Bank Digital Currency this could happen automatically.
These are arguments that are frequently used by proponents of digital money. However, opponents of digital money see the above arguments as a danger and the programmability of a money system may lead to abuse and violation of privacy. Former MP Mahir Alkaya also warned about digital money and the associated surveillance state in an interview with Holland Gold. "Governments should not impose restrictions on the use of money and therefore should not be able to determine what someone can spend the money on. The anonymity of the transaction must be guaranteed when you develop digital money."
The digital euro could be an enrichment through the implementation of new technology and a clear vision of how the digital euro could contribute. But whether the digital euro will ever fully exploit its potential remains to be seen. The aforementioned Menno Broos indicated in the podcast that he does not expect the digital euro to be adjusted any time soon: 'I don't see it happening that you are going to launch the digital euro as a means of payment now and then expand it in five or ten years' time with a savings function. Technically, it is feasible, but you have to be clear from the start what you are going to do with it. Our advice would be; With the resources you have, focus on onen goal'. But of course, the question remains what the need for the digital euro is if it does not solve an acute problem.
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On behalf of Holland Gold, Paul Buitink interviews various economists and experts in the macroeconomic field. The aim of the podcast is to provide the viewer with a better picture and guidance in an increasingly rapidly changing macroeconomic and monetary landscape. Click here to subscribe.
