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Little by little, more is becoming clear about the new currency that the European Central Bank (ECB) is very likely to introduce. Last year we wrote An in-depth article on the digital euro, but recently the ECB came up with news: the use of the digital currency does not come at any cost to the users. Also, the ECB says that the digital euro will offer its users about the same level of privacy as cash payments, but is that really the case?
Since November 2023 the ECB has entered the next phase with the digital euro. In this preparatory phase, the groundwork is laid to actually introduce the digital currency. This means developing the infrastructure of the digital euro together with potential providers. It is also Rulebook with all the technical aspects of the digital euro. That Rulebook will probably be presented later this year.
Last year, it was already ruled out that the digital euro would bear interest. In itself, this makes sense, since interest is seen as a reward for the risk that a lender runs. After all, the lender runs the risk that the borrower will not be able to repay. Today, anyone with a bank account is a lender, as a bank account is a debt owed by the commercial bank to the account holder.
Although there are also account holders in the case of a possible digital euro, these account holders are not at risk. While the digital euro is a central bank debt, the central bank is in a special position. The central bank can never be short of what it produces; money. Therefore, the risk that account holders run is minimal and the lack of interest is also logical in that respect.
Nevertheless, interest rates could eventually be introduced as a monetary transmission channel. The German economist Ulrich Bindseil had already researched a design in which there was a ''tiered remuneration'. In such a case, different interest rates apply to different brackets. The central bank can encourage both saving and spending, which helps it dampen the cyclical waves. Nevertheless, such a construction is out of the question in the short term.
Any form of programmable money is also excluded. So, we don't have to fear any kind of coercion or coercion during transactions. Actually, the fear of far-reaching control by the central bank was unjustified anyway. There are always alternatives available, such as the regular checking account, cash, and even cryptos. Not only the DNB, but also the House of Representatives intends to always have room for cash transactions. Thus, one is never obliged to use the digital euro, even if a programmable digital currency were introduced.
What is remarkable about it press release of the ECB is that the central bank indicates that the privacy of the digital euro is similar to that of cash. According to the ECB, the details of the transaction with a digital euro are known only to the recipient and the payer. The ECB states the following on The website;
"And even if you pay online, we would make sure that your financial activities are known only to you. The Eurosystem would not be able to link you directly to your payments. A digital euro would be a public good. We will therefore never use your data for commercial purposes.'
As a result, the privacy of the digital euro appears to be identical to the privacy of cash. But if one reads further, it turns out that the situation is different. When the ECB explains who has access to payers' data, the privacy of the digital euro seems to be more in line with that of a regular bank account. Cash payments are completely anonymised, but digital euro account holders are monitored for money laundering and terrorist financing, according to the site;
‘As with other digital payment methods, intermediaries such as your bank would only have access to the personal data necessary to comply with EU legislation, such as anti-money laundering and countering the financing of terrorism regulations."
The ECB does say that the account holders are pseudonymised, which means that the central bank cannot see personal data that could be traced back to account holders. However, since commercial banks have to comply with EU legislation, they are likely to be able to pass on data to authorities and then track down criminals. So while the central bank only has access to pseudonymized data, the level of privacy is likely to be less than with cash payments.
Last year, the limit on the amount that can be held in digital euros seemed to be 3000 euros. However, the Bundesbank seems to be the to give preference at a lower limit, namely between 1500 and 2500 euros. One reason for this is that commercial banks will see their reserves dwindle if people switch en masse to the digital euro. On Holland Gold However, an article was published last year that showed that commercial banks probably have nothing to fear from the digital euro in the short term.
The spectre of commercial banks: the digital euro will cause a decrease in the balance sheet. (Source: ECB)
A shrinking balance sheet is probably fairly easy to overcome with wholesale funding. This means that the commercial bank borrows money from the central bank, which means that it retains the space to provide loans to its customers, for example. In that case, the balance sheet of the commercial bank does not shrink. It is also unlikely that account holders will switch en masse to the new currency, as the digital euro is not an interest-bearing asset.
The bank borrows from the central bank, so the balance sheet does not decrease. (Source: ECB)
A limit on the number of digital euro that can be held does not necessarily mean that large transactions cannot be made with the digital euro. This is because the digital euro account can probably be linked to the current payment account. Ideally, the digital euro payment account should also be accessible via the app of commercial banks, Inge van Dijk, Division Director of Payments and Market Infrastructure at De Nederlandsche Bank, indicated to BNR. In addition, one can also keep a digital wallet, into which digital euros are deposited at any time. In this case, the digital euro account does not need to be linked to the current bank account.
If a transaction of €10,000 is made, while the amount of digital euro is limited to €3,000, the system automatically detects that there are too few digital euro available and the remaining €7,000 is debited from the regular payment account. The condition is probably that the accounts are linked to each other.
Much is still unclear about what exactly the digital euro will look like. Much is also still unclear about privacy. We will have to wait for more publications from the ECB before we can say more about the new currency.
