Is “Digital Euro” the next hope of Europe for payments sovereignty?

As Web3 moves forward with patient steps towards creating a decentralized finance infrastructure; one topic that is explored is the role of central banks and their interest in building their digital currencies; called CBDCs. That acronym stands for central bank digital currency.

It is said that dozens of CBDC projects are being considered, or even being executed by the central banks. Atlantic Council Geonomics Center CBDC tracker puts the number of countries exploring CBDC at 130. One of these projects is the Digital Euro of European Central Bank and the topic was on the agenda of multiple sessions at the Money20/20 event that took place in Amsterdam on June 4th-6th.

Arguments “for” Digital Euro

Evelien Witlax, the Digital Euro Director of ECB came on stage and asked the audience if they think European payments sector would benefit from a digital euro. The sizable crowd provided their response through Slido and 66% said yes.

Pleased with the response, she went on to explain the following about the digital euro:

Necessity:

• Use of cash in Europe is diminishing as more and more Europeans use digital forms of payments (per Piero Cipollone, Member of the executive board of ECB’s presentation at CEMLA, the use of cash has decreased from 72% in 2019 to 59% in 2022). Therefore, the central bank cash needs to evolve towards digital as well,
• There is no Europe wide and European build digital payment solution. The existing digital forms of payments are offered and operated by non-European entities (again, Mr.Cipollone reports 13 out of 20 European countries don’t have a national card scheme and international schemes account for 64% of all digital transactions with cards issued in the euro area),
• The need for financial inclusion for all Europeans is even more important with the addition of the need for “digital” financial inclusion. A Digital Euro will be for public good and achieve this by taking everybody on board,
• The Digital Euro will ensure the economic sovereignty of European states.

Legislation:

• Offering of a Digital Euro is not inevitable. It will not come to life naturally, if it is not built deliberately,
• European Comission believes in the value of Digital Euro and gives it a priority,
• A legislation will be enacted by the parliament to make the Digital Euro legal tender, ensuring that is easily accessed and widely accepted,
• Merchants will be required to accept digital Euro, if they are already accepting other forms of digital payments.

Use of Digital Euro:

• Digital Euro will be a choice, in addition to cash,
• Can be used for person-to-person transfers, in store payments and e-commerce payments,
• Free for basic use,
• Available domestically and across Euro area,
• Will be available online and offline,
• Available via physical cards, mobile apps (dedicated digital euro app or payment service provider app) and web interface,
• Will adapt to internet, NFC and QR codes.

Confidentiality:

Evelian spent a while to ensure the solution will be designed with security and confidentiality as the highest design principles;

• There will be safeguards to ensure privacy of transactions. There will be no tracking of who paid who for what,
• This will not be programmable money, limiting the type of payments to be made with digital euro.

The session ended with a repeat of the poll that was held in the beginning, delivering the same result: two thirds for, one third against. Apparently the arguments were strong enough to confirm the supporters’ perceived benefits, whereas not strong enough to convert nay sayers.

Arguments “against” central bank digital currency:

The panel named “The elephant in the room: Do CBDCs solve real problems?” provided the views of ex-regulator Jon Egilsson (now Chairman and Co-founder of Monerioum) and banker Ronit Ghose, who is the Global Head of Future of Finance at Citibank, moderated by Nilixa Devlukia of Open Finance.

In summary the panelists provided a negative view about the need for digital euro, with the following arguments:

• There are no users asking for CBDC,
• Retail space does not need CBDC for payments. Wholesale space can use it for interbank payments,
• CBDC is like a spare tyre. It will be a useful tool for central bankers to build a CBDC for settlement redundancy and political reasons,
• Retail CBDC means central bank is competing with private companies. This is not the role of central banks,
• Digital Euro will crowd out innovation and shy away fintechs. This doesn’t make sense.

My thoughts:

• It was interesting to hear ECB’s reasoning for digital euro. One factor they listed was the need to provide an alternative to the dominance of international schemes. I thought EPI (European Payment Initiative) was going to be Europe’s response to the prevalance of international card schemes. The fact that I haven’t heard or seen much about EPI or any other Europe wide card scheme at Money20/20 leads me to believe that Europe has given up on yet another payments initiative and that Digital Euro now provides the new hope for the continent. Let’s wait and see.
• De-centralized solutions provide hope for advancing individual freedoms. That must include “transactional freedom” for the individual as well. There may be a utility for CBDCs if they are based on legislation guaranteeing transactional freedom to individuals as a basic “right” and that this right is protected by totally independent judiciary.