Technological solutions and innovative services are designed, developed and adapted to meet the mission of making people’s daily activities, including financial payments, easier.
The European Central Bank is also currently looking for an alternative to cash in order to create the most convenient tool and application possible. Why a virtual currency strategy, and does its implementation mean that the digital euro has the potential for the future?
Historically, the digital currency era was ushered in by Bitcoin, which broke into the financial technology sector with rapidly growing popularity. Almost every financial conference presented why it should be invested in and what the benefits of such investment are. Although the European Central Bank has always considered Bitcoin a risky asset used for gray and possibly illegal transactions, intensive marketing has achieved its own: the demand for such money instruments is increasing. Digital currencies are attractive and attracting more and more people, despite the European Central Bank’s attempts to discourage investment in this speculative market. That is why Central Banks around the world are looking for alternative solutions to the future of physical money in the digital age.
The growth of the virtual currency is also facilitated by the ambition of the social media company Facebook to create its own cryptocurrency Libra. To avoid similar fluctuations in the value of similar digital money to date, the company said it would ensure the stability of Libra by pegging it to a basket of currencies. Recognizable partners from MasterCard and Visa to Spotify and Uber were invited to create the project. The main goal is to promote global business among about two billion Facebook users of social media. However, banks, supervisors and politicians pointed to significant risks in the digital currency initiative, promising to block the idea of social media, so a number of large market players left the project. However, this has not stopped Facebook, as the cryptocurrency is planned to be introduced in 2021 under a new name “Diem”.
Undoubtedly, the process was also accelerated by the impact and spread of the Covid-19 pandemic, marked by the World Health Organisation’s recommendation to increase the use of contactless payments. This has led to a great leap in society’s growing skills and understanding of digital payments, their convenience and security. Naturally, in response to these global trends, the European Central Bank took a step further and decided itself to create a digital euro as an alternative to cash with guaranteed currency value, stability and governance.
Why a digital euro? The answer lies in a number of countries, such as Sweden, which has a highly developed digital economy. The only reason people continue to use cash is a virtual alternative that has not yet been introduced and is easy to use. Therefore, the logical task is to offer a solution to be able to adapt to the process of digitalisation of society, which is characterized by electronic document circulation, proof of identity and versatile solutions, where physical money actually remains the only paper. But the introduction of the digital euro would mean that the same banknote or coin would be transferred from a wallet to a telephone or other smart device, giving its holder a unique currency unit. At the same time, the solution would mean that the digital currency could be converted into cash at any time, thus ensuring public confidence in the payment instrument. From a functional point of view, identical requirements would apply, as in the case of cash, to the Central Bank, which would organize the issuance and management of the digital euro in support of national monetary independence, while commercial banks are likely to act as intermediaries.
However, these developments also pose many challenges, especially in the area of legislation in the context of central banks. One of the important issues is anonymity. If physical money is completely anonymous, should it also be a digital currency and how can the central bank provide it? What will be the role of banks and many payment service providers in the circulation of digital money, as the circulation of cash does not require a bank account?
Of course, no exact scenario for the development of the digital euro is currently predictable, as there are a number of technological solutions and directions. However, one thing is clear – every product is replaced by a new one over time – more convenient, faster, safer or cheaper, which the public is becoming more interested in and eventually use on a daily basis. In order for the digital euro service to meet all the preconditions, pilot projects, industry discussions and public consultations on possible solutions are being organized in several European countries. The European Central Bank has now received thousands of comments from organizations and experts on the introduction of the digital euro in order to assess and achieve a successful outcome. However, it is expected that a reliable payment method will be created, with value and security – as in the case of the ordinary euro in our wallets – guaranteed by Central Banks and national governments.