The European Central Bank has been working since 2021 on a prototype digital euro. The goal is to present in 2023 a simple digital currency model, compatible with monetary stability and safe for everyone. If all goes according to plan, the digital euro could be in circulation in 2025 or 2026.
The ECB has made it clear that more than a substitute for cash, it would rather be a complementary instrument to facilitate payments for European citizens, reducing transaction costs and increasing confidence in digital operations and in public money.
It is about giving a centralized response to the proposal of decentralized finance and crypto assets, guaranteeing a certain anonymity (but not full anonymity) of citizens, as well as a much higher number of transactions than that offered by cryptocurrencies.
All this while also maintaining the three fundamental elements of a currency (and which today cryptocurrencies do not offer simultaneously): being a means of payment, a store of value (which allows savings) and a unit of account (for pricing).
Physical currency does not disappear
Although physical money will survive, in an increasingly digitized and modern economy it will be increasingly inefficient, residual and controversial.
In addition, it remains to define what will be the role of banks in the creation of money.
If the digital euro proposal allows citizens to deposit their money in the ECB, the role of banks could become irrelevant and would severely affect traditional financial intermediation. The reason is that citizens would prefer to deposit their money with the ECB rather than with a commercial bank, which would always entail more risk.
One option would be for commercial banks to offer deposit rates attractive enough to justify the risk. But everything indicates that the proposal that goes ahead will take into account the role of current banks and their potential for systemic risk.
A gradual incorporation
In the first instance, after the launch of the digital euro, a large part of the status quo to avoid problems of financial instability and mistrust. For example, cash, even if it becomes irrelevant in the long run.
The role of banks in financial intermediation and deposit-taking would also be maintained, although their business model would be bound to change due to high regulatory pressure, the proliferation of shadow banking (out of the reach of financial institutions, regulations) and the possibility of depositing the digital euro with the ECB.
In Spain, according to the National survey on the use of cash carried out by the Bank of Spain, the use of physical money in citizen transactions has been on the decline since 2014, the year in which 80% of those surveyed chose it as their first option.
In 2020, the year of the pandemic and in which the Bank of Spain carried out the last survey, 39% of citizens stated that they used cash as the most common means of payment, with the younger and older segments of the population being those who they used it more.
What happens in Europe
Some northern European countries have already reduced the use of cash very significantly; in the case of Sweden, already in 2020 to less than 10%. In fact, its central bank, the oldest in the world, is consciously leading this process that will imply, sooner or later, the full banking of economic activity and the virtual abandonment of the use of cash in commercial transactions.
The proposal that is made from the ECB will not include a drastic introduction of the digital euro, but rather an incremental process that will be resolved naturally, without alarmism, making physical and digital currency coexist and without altering the situation of the bank in view of its potential. systemic risk.
The digital euro, when implemented, will bring lower transaction costs and, therefore, greater monetary efficiency. Something from which all Europeans will end up benefiting.
