When Bitcoin was introduced more than a decade ago, it revolutionised the world of finance. As a decentralised payments infrastructure, it offered speed and security without the interference of financial intermediaries or central banks.
While some observers predicted the digital currency would overtake traditional finance, Bitcoin never became a widely adopted payment method. Its underlying technology, however, still offers tremendous potential, and central banks around the world have embraced this new technology by developing their own digital currencies.
[To hear the other side of the argument, read this piece on the benefits of creating a digital European currency.]
In the European Union, there have been debates about the possible introduction of a digital euro as an electronic equivalent to cash. In the Netherlands, the proposal became so controversial that lines formed outside the Tweede Kamer, the lower house of the Dutch parliament, during the debate.
Wild claims on social media that the European Central Bank (ECB) might use the digital euro for mass surveillance, by allowing governments to monitor and control our spending behaviour, fuelled the raging debate.
Although I wonder whether such dystopian ideas are even technically feasible, I do believe that the introduction of a digital euro warrants a big question mark.
Let’s look at the facts. First, a digital euro account will not be compulsory; physical cash will continue to exist.
Secondly, the ECB cannot introduce a digital euro without political approval. While a proposal to adopt a digital euro is currently being drafted by the European Commission, these plans will need to be supported by the European Parliament and the EU member states.
Thirdly, Fabio Panetta, the ECB executive board member responsible for the digital euro, has confirmed it will not be programmable, will not bear negative interest, and will not be integrated into an EU digital identity. In other words, privacy should be legally guaranteed.
It's also worth looking at the reasons why the ECB is pushing for a digital euro. Panetta claims it will be a “fast, secure and financially inclusive payment alternative”. He also believes the Chinese digital yuan, or e-CNY, introduced in 2020, could one day become a dominant global digital currency and threaten Europe’s payments landscape.
To me, these arguments sound almost as far-fetched as the conspiracy theories I’ve seen circulating on Twitter. We already enjoy all the supposed advantages of a digital euro with traditional cash and commercial bank money. We already have ample possibilities for instant payments, and the EU’s deposit guarantee scheme protects all account holders’ savings up to €100,000.
Panetta’s argument of financial inclusion is also moot, because nearly 92 per cent of Europeans over 14 years of age already have a bank account. According to the People’s Bank of China, the e-CNY constitutes a mere 0.13 per cent of total yuan in circulation in the country2. Not exactly a sign of a strong contender vying to become the premier global reserve currency.
There simply is no business case for a digital euro against the backdrop of the current payments landscape. It is a solution looking for a problem, and one that will only confuse consumers and the already vulnerable financial markets.
For geopolitical reasons, it’s probably best to do some legwork so we’re ready and able to move ahead if a digital euro is necessary in the future. But for now, the digital euro is best left on ice.