In 7 years there should be a Digital Euro (approx. in 2028?!) — according to the ECB. Already in 2022 there will be the digital Yuan, and after that further digital currencies, e.g. the digital US Dollar.
One would think that with a duration of 7 years, the digital euro will at least fulfill everything that can be expected today: Privacy (anonymity up to, say, 1,000 euros), programmability (smart contracts), instant free transferability anywhere in the world. However, if you ask around in expert circles, it is exactly these things that will be lacking (except perhaps the last point).
This begs the question, why will it take 7 years for the Digital Euro to hit the market and why does it not fulfill basic things of today’s cryptocurrencies? To the first question, the answer came that they want to take their time to get everything right and there seems to be no time pressure. Since apparently no programmability is required (many see differently, see for example Digital Euro Association and bankenverband), this is also not planned.
The question is why we need a digital euro in the planned form if we already have “digital money”.
If SEPA Instant Payment were to be available everywhere and even free of charge, we would not need the digital euro — as it is currently planned.
What Europe needs is a digital euro that will be ready for the market in 2–3 years at the latest. However, this must have the full design of a digital currency, as we already know from various other cryptocurrencies.
First and foremost, this includes a certain degree of privacy. For example, payments up to 1,000 euros should be completely anonymous — just like cash. There have already been studies (see Designing a Central Bank Digital Currency with Support for Cash-like Privacy) showing that privacy is possible while preventing money laundering and terrorist financing. Experts such as Jonas Gross, Johannes Sedlmeir, Matthias Babel, Alexander Bechtel, and Benjamin Schellinger should be consulted to assist the ECB in designing the Digital Euro in this regard.
The next important factor is programmability. Blockchains like Ethereum enable smart contracts. And they have been doing so for years and very successfully. Without programmability, the digital euro is missing a crucial factor — without it, it would be useless. As a pure means of payment, we already have a great many alternatives from the private sector that are used significantly more than anything a state (or association of states) could ever create.
Of course, the digital euro must first and foremost be a legal tender. Whether it is issued by the ECB or private banks is of secondary importance in my opinion. Personally, I would prefer it to be issued by the private banks, because they can handle this logistically and technically better than the ECB. The necessary personnel is lacking here.
In my opinion, it makes little sense for a private individual to be able to hold 1,000 euros at the ECB and then have the rest in the account of the bank he trusts. The effort on the part of the ECB would be far too high to provide every European with an account for up to 1,000 euros. Moreover, the question arises as to where the benefit for the consumer is supposed to lie here.
Of course, the properties of money must also be fulfilled by the digital euro.
These are (with my own extension of the classic money functions):
Means of payment: It must be a legally recognized means of payment that is accepted everywhere and does not incur any payment costs.
Store of value: The money must retain its value as best as possible. We have known for a long time that fiat money without a quantity restriction (you can print as much as you want) is inflationary and loses up to 2% of its value per year on average (e.g. in Germany in recent years — currently significantly more). The Digital Euro will not solve this problem, as it will be exactly the same as the Euro is today.
Unit of account: Money must be seen as a unit of account. Everyone must be able to know how much one euro can buy. It must also be divisible (cents).
The digital euro has the possibility of being even more divisible than the previous euro. This means that less than 0.01€ can exist. This is also urgently necessary in the age of Internet of Things (IoT). For micro-payments we need a smaller subdivision than 1 cent.
Should the criteria listed here be taken into account in the conception of the Digital Euro while adhering to the (extended) money functions, and should this be ready for the market in 2–3 years, I am optimistic. If we continue on the current path, I do not think we will need a “digital euro” (as the ECB currently envisions it).
Please note: This is an article, which was written in December 2021. This article may be updated. I am aware that there are many more exciting topics around a potential Digital Euro. In order to not make the text even longer, I have focused on a first overview and my main standpoints.
Other topics will be addressed in the next Digital Euro article.
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Philipp J.A. Hartmannsgruber holds a master’s degree in Finance & Accounting and a bachelor’s degree in Economics.
He is Founder & Managing Partner at PJAH Consulting, his own Consulting firm. He is also Head of the Taskforce DeFi and NFT at ITSA (International Token Standardization Association) and Co-Founder & Co-Host of the Cryptoberfest. A Bit’s and Pretzels like 3-day event in September 2022, with the highlight of networking at an own tent at the Oktoberfest.
Recently he joined the DEA (Digital Euro Association) as a fellow.
In 2019 he founded ShareHope, a non-profit NGO, right now in stealth-mode.