Digital euro, what new currency could join cash and why should banks be afraid?

The “digital euro” is beginning to take an increasingly concrete form, a new currency being worked on by the European Central Bank that could, within a few years, turn into an electronic equivalent of cash. The goal is to respond to the proliferation of cryptocurrencies and provide a free alternative to large – almost always American – payment circuits such as Visa and Mastercard. But there are those who have much more to lose than to gain from the creation of a digital euro. These are the banks that during the consultation phase launched by the European Union sent about 100 notes confirming the risks of the project. According to the Mediobanca report, a loss of between 5 and 20% of profits looms for European credit institutions, between lower interest on deposits and lower commissions on payments.

What is the digital euro?

The digital euro, which European institutions are working on, would represent an alternative currency to physical banknotes, and would allow anyone to pay digitally in eurozone countries. The current project involves the use of a free application – which can be used both online and offline – which will serve as a kind of e-wallet. Therefore, if a digital euro is introduced, it will effectively become a new currency, which must be accepted everywhere within the eurozone. The Commission’s Vice-President, Valdis Dombrovskis, has specified several times that “the euro is still a euro”, regardless of whether it is a physical currency or a digital amount. Anyone will also be allowed to convert physical euros into digital euros and vice versa.

It’s a long way from now to 2028

The first action that triggered the long gestation period for the digital euro dates back to July 14, 2021, when the ECB Governing Council approved the project for the first time. Over the past two years, all risks and technical aspects have been assessed during the “exploratory phase”, announced by the European Central Bank. Officially concluded In the last few weeks. We have now moved to the second step of the project, the so-called “preparation phase”, which should continue for at least another two years. The goal is to reach the actual birth of the digital euro on January 1, 2028. Before that happens, the project will have to be examined by other institutions in the European Union. Last June, the committee presented A Law proposal Which defines a series of legal boundaries within which the project must move. However, the proposal must also be formally approved by Parliament and the Council. Among the initiative’s most ardent supporters is the current governor of the Bank of Italy and former member of the European Central Bank’s Governing Council, Fabio Panetta, who believes that “central bank digital currencies will bring significant advantages to digital payments.”

The European response to cryptocurrencies and big tech companies

In technical terms, a digital euro will be a central bank digital currency (CBDC), i.e. a country’s digital currency. Similar initiatives are already underway in India and China, with several other countries expressing interest in following the same path. The growing interest of central banks in CBDCs is due to the ever-increasing percentage of digital payments – at the expense of cash – and to the proliferation of own cryptocurrencies. It is also for this reason that the objectives of the project developed by the ECB include the defense of monetary sovereignty, which is at risk precisely because of the success of various bitcoins, ethereum and the like. But cryptocurrencies are not the only player that the digital euro may compete with. The aim of the Euro Tower is actually also to counter the excessive power of big technology companies, which aspire to occupy an increasingly important place in the payments sector. Example? The agreement reached by Apple with Goldman Sachs to launch a savings account in the United States with an interest rate of 4.5%, which shook credit institutions around the world. With a digital euro, the ECB wants to try to prevent the problem, and avoid – as has happened in other digital sectors – big tech companies gaining (almost) monopoly status.

Bank concerns

However, it is the banks that fear competition from the digital euro, and the reasons are easy to explain. The new system that the European Union is working on provides an alternative to electronic payments, in which transactions do not include any commission, unlike debit and credit cards. Added to this is another source of concern. As it is now organized, wallet The electronic account envisaged in the digital euro project would for all intents and purposes function like a deposit account, effectively affecting another revenue component for banks. Precisely in order not to overturn the financial system, the draft law presented by the European Commission in June provides for some corrective measures. First, the hypothesis of setting a maximum ceiling for deposits, with Panetta speaking in a speech before the European Parliament about a threshold of 3 or 4 thousand euros. Another condition requested by CEO Ursula von der Leyen is that the digital euro does not generate interest. This is a request to which the European Central Bank has already raised some objections. Then there is the issue of privacy. Financial Services Commissioner Mairead McGuinness has determined that the digital euro is “not a Big Brother project” and, just like cash, payments will not be tracked. The road leading to the actual implementation of the new European currency is still long. What seems clear from now on is that it will be primarily the banks that will struggle to try to get some concessions in the final version of the ECB project. Their fear is that in order to meet the growing trend of digital payments, a disintermediation process will be created, where credit institutions will inevitably lose out.

Image credits: EPA/Ronald Wittek | European Central Bank President Christine Lagarde during a press conference in Frankfurt (September 14, 2023)

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