Digital euro planned as central bank money

Digital euro planned as central bank money

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The European Central Bank (ECB) plans to introduce the digital euro. This is intended to prevent banks from losing power through cryptocurrencies. Because the central bank wants to offer one thing above all with the digital euro – security. The private banks therefore fear business slumps.

What if the central bank of European states simply issued digital money directly to its citizens? That could shorten the cumbersome route via private banks. They “borrow” the money cheaply from the central bank and only then pass it on to the customers. A digital euro is therefore a new kind of money – directly distributed and managed by the central bank. The private banks have concerns about this. But the ECB project is also controversial in terms of data protection.

A centralized digital currency

According to the will of the ECB, the digital euro should become the official means of payment in the European economic area. A high level of security should prevail with the state digital currency as with cash.

You have to keep in mind the principles of our monetary system. The citizens own the money and store it as a means of payment at the private banks. The banks make the central bank money, which they borrow from the ECB according to key interest rates, available to the citizens through loans. The private banks earn the money by lending it to borrowers at higher interest rates.

The digital euro is also to be issued by the ECB. In contrast to the most famous digital cryptocurrency Bitcoin, it is a centralized digital currency. Unlike Bitcoin, a bank would oversee the processing of digital payments. In addition, according to the current plan, individual citizens would never fully own a digital euro. This means that there is no comparison with digital cryptocurrencies. These are partly based on decentralized networks such as the blockchain.

Is the private banking system at risk from the ECB?

The ECB has received many critics of the digital euro for the increased control and planned monitoring of payment transactions. Because unlike cryptocurrencies, registration offices should be able to get information about users and transactions. All in the interest of fighting crime. But why are even private banks afraid of the project?

This could be due to the increased security of virtual central bank money. Unlike crypto money, a direct exchange between digital euros and cash euros would be possible at a 1:1 rate. As Fabio Panetta, Member of the ECB Executive Board, states:

“We must preserve the role of central bank money as the anchor of the payments system, so that the different forms of money can easily coexist, interchange and complement each other.”

Fabio Panetta, The digital euro and the development of the financial system, ECB, 06/15/22.

The private banks therefore fear strong competition from the possibility of transferring money from a bank account to the state wallet. Why leave your money at a private bank when you can park it directly at the ECB? This is an important point because the ECB is currently promoting that it wants to be responsible for its own digital currency. This is precisely what could set it apart from cryptocurrencies. In order not to worry the banks, the ECB states that the digital central money should primarily be used as a means of payment and not as an investment. In addition, the private banks are to be involved in the digital euro project.

Also read: What are ETFs and for whom are they worthwhile?

Inventory of 1.5 trillion digital euros

So that millions of citizens do not come up with the idea of ​​emptying their bank accounts and investing in the virtual euro, the stock should be limited. This possibility of value protection would be too tempting. The limitation is primarily intended to prevent negative consequences for the financial system. According to analysts, the total stock of the digital euro would probably be capped at 1 to 1.5 trillion. Fabio Panetta explains:

“With a current population of around 340 million people in the euro area, this means that each of them could hold around 3,000 to 4,000 euros in digital form.”

Fabio Panetta, The digital euro and the development of the financial system, ECB, 06/15/22.

A tiered rate of interest is being considered, as well as limiting the total portfolio. In this way, credit on the digital euro could be subject to different interest rates depending on the credit. In a first balance level for everyday payment needs, the balance would bear zero or positive interest. The interest on the second credit level above a certain amount would then be below the interest on other secure assets. The ECB wants to avoid the virtual euro as an investment because central bank money can best combine security and stability.

Due to these planned measures, the digital euro can be seen as a kind of fast-moving money that should constantly circulate in the economic cycle.

Controversial issue of data protection

In addition to centralization, the problem with digital central bank money is the lack of anonymity. Because while the user traces of the cash are largely anonymous and some cryptocurrencies attach particular importance to privacy, the digital euro will probably become a data octopus. While the ECB, as a public institution, wants to ensure a high level of privacy, Panetta seems to have other goals to consider:

“At the same time, we need to assess privacy in the context of other EU policy objectives such as combating money laundering and countering terrorist financing.”

Fabio Panetta, A digital euro that meets the needs of the population – finding the right balance, ECB, 03/30/22.

With the approach of a virtual central bank money, the digital euro has interesting aspects that make an intermediate role for private banks partially superfluous. Nevertheless, digital state money also harbors dangers. After all, a centralized authority then determines who and how much digital money everyone gets. Concrete dangers of state abuse would be blocking of digital wallets of unwanted people or sudden taxes and fees on digital monetary values. As long as the decentralized cryptocurrencies still exist, there is at least a free choice of digital means of payment.

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Digital euro planned as central bank money

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