Prepare yourself for the digital euro

The ECB is now emphasizing the benefits for European consumers and retailers, who will soon be able to pay and receive money with the same digital payment method everywhere in Europe. For many German citizens, the emphasis on increased privacy compared to commercial schemes will be attractive. French consumers may be enthusiastic about new innovative services. Retailers may expect lower rates as a result of increasing competition with commercial providers. This charm offensive seems to be having an effect. European consumer organizations are now positive about the project. That is new, because a year ago the sentiment was still “to what problem is the digital euro the solution?”

Survey among entrepreneurs by DNB

Apart from this large-scale survey by the ECB, De Nederlandsche Bank (DNB) is investigating what merchants think of the digital euro. We were selected as part of the research group, even though we are not a retailer. This gave us a good idea of the questions that our central banker has about how the digital euro can be introduced in the Netherlands.

During the conversation we had with research agency Conclusr, the contours of the payment method were outlined. The offline functionality was mentioned as one of the most important advantages. Fortunately, national disruptions to the payment infrastructure have occurred sporadically in recent years, but on 16 May the country was shocked by a major disruption between 6:00 PM and 9:00 PM. As a result, electronic payments (“pinning”) were not possible for three hours. Precisely because such disruptions almost never occur anymore, retailers often do not have an alternative payment option available. Therefore we do not think it unlikely that the digital euro, when introduced, will be explicitly promoted to Dutch retailers because of its offline functionality. As stated in the infographic of the ECB:

“A digital euro would be able to go places where cards today can’t go, as transactions would be possible even when there is no internet or mobile service”.

The results of the research by DNB are expected in early 2025.

Pan-European, comprehensive and inclusive

The RDB writes in the third progress report: “A digital euro has the potential to establish a comprehensive payment method that is usable across the entire euro area, covering a wide range of use cases (POS, peer-to-peer and e- commerce transactions, for example) and functionalities that add value for end users. Such value is reflected in distinctive features such as pan-European coverage, inclusivity, a high level of privacy, free basic use and offline functionality. Currently there is no European payment solution that covers as many use cases as a digital euro would.”

But wait, doesn’t the European Payments Initiative (EPI) have the same ambition? And the fact that EPI is knocking on the door with its first product, the wero, is that not largely the result of long-term pressure from those same European regulators and politicians?

The European banks are required by the ECB to provide access to the digital euro infrastructure, by means of an account and a wallet. European retailers are required to accept digital euros. With this big stick, the digital euro has a significant competitive advantage over EPI. EPI must now hope that citizens and companies will embrace the wero. Is the ECB frustrating the chances of EPI’s wero as a new pan-European competitor to the international card schemes?

Banks are critical if the digital euro

That is why banks, as initiators of EPI, are now making critical comments about the digital euro. Some of these concerns seem justified to us, for example the questions about the scope and ambitions of the project and the effect on EPI. Other concerns are about the costs: who pays for the digital euro? The fixed costs for the existing payment infrastructure continue, while a new infrastructure is being added. Big Tech companies can offer their customers access to the digital euro system with their apps. They will be financially compensated for this by the ECB, while the costs of the existing payment systems are for the banks. These concerns are understandable, but also somewhat obligatory: for example, mobile payments only really took off when Apple Pay made its entrance, via… the banks. In this way, the banks themselves brought in the Trojan Horse, Big Tech.

How European will the digital euro remain?

One of the main drivers of European regulators to advocate a digital euro was the undesirable dependency on non-European players. Isn’t that pan-European ambition disappearing somewhat into the background? After all: Mastercard, Visa, Apple, Amazon etc. can start offering access to digital euros, and they can expect a cost reimbursement from Europe. Two European principles seem to collide here: on the one hand, the desire to enable a European payment system and reduce dependency on non-European companies, and on the other hand, the neoliberal principle that the government enables equal access to the market for all players, regardless of where they come from.

Perhaps European policymakers are hoping that the privacy restrictions on the use of digital euros will deter Big Tech companies. After all, companies that base their revenue model on data will be less interested in anonymised applications. The question is, however, whether the Big Tech companies‘ data scientists will be deterred by this. After all, anonymised data can, with some effort, be traced back to individuals using linked geo, click and other data. And traditional payment companies such as Mastercard and Visa will undoubtedly want to add the digital euro to their portfolios when it comes.

So, is the digital euro coming?

Yes, the digital euro is coming. That much is clear at the end of the preparatory phase. So much has already been invested in the project, and so many expectations have been created, that a no-go decision would be unimaginable. Moreover, the eurozone cannot easily withdraw from the global race to issue CBDCs.

Nevertheless, the form in which the digital currency will come is not yet set in stone. For example, the public debate has now led to the conclusion that the digital euro will definitely not be programmable. A justified decision from a privacy perspective, but at the same time a disappointment for those who were hoping for many new innovative applications. The ECB and the EC are doing their best to position the digital euro as a “force for good” and to allay all concerns as much as possible. It is striking that the ECB keeps repeating: “A possible decision by the ECB’s Governing Council to issue a digital euro would only be taken once the digital euro legislation has been adopted.” In other words: it is the central bank, and not politics, that makes the final decision on issuing digital euros, but not after the legal framework has been determined by politics (i.e. the European Commission and the European Parliament). It seems that with this disclaimer the ECB has learned lessons from history, in particular the (initially) lagging public support for the paper euro.