The pandemic accelerates the path to the digital euro

Fabio Panetta, one of the six members of the powerful Executive Committee of the European Central Bank (ECB), wondered last Thursday in a virtual event on the future of payments in Europe what would happen if consumers were increasingly reluctant to use of cash and foreign digital payment systems will grow to the point of displacing domestic money.

The answer can be summed up in two words: digital euro.

This initiative, which until recently sounded like a theoretical debate by a few wise men, is gradually on the way to becoming a reality.

The coronavirus pandemic has not only revolutionized the economy and life habits of half the planet.

It has also fueled user fondness for electronic payments, a change that has helped accelerate the ECB's plans to launch its own digital currency.

The body headed by Christine Lagarde has just launched a public consultation in which it will ask all interested parties.

Once you have all the information, you will decide whether to jump into the pool or not.

The idea is that this process takes a few months, and that the final decision is made in the spring of 2021.

“The latest proposals for central bank digital currencies are becoming more and more pragmatic.

The debate is now focused on offering an alternative to cash, not on competing with banks in the deposit business.

Anonymity has been ruled out, making it clear that users of this currency must identify themselves to avoid problems such as money laundering.

Nor will they compete with banks in payment services such as direct debit ”, explains Santiago Fernández de Lis, head of Regulation at BBVA.

The debate over digital currencies backed by large central banks - a model that moves away from cryptocurrencies like bitcoin, which have no central body to control them and suffer from high volatility - is not new.

Last year, it gained momentum thanks to - or because of - Facebook's plans to launch Libra, the currency that threatened to become a ubiquitous payments giant.

It was at that time, at the beginning of this year, when the pressure of the pound pushed the Bank for International Settlements to create, together with the ECB and the central banks of England, Japan, Canada, Switzerland and Sweden a group to study the creation of digital currencies and analyze your various design options.

But reluctance from regulators and central banks, who feared Libra's ability to erode financial stability, forced Facebook to lower its ambition.

The idea evolved from a digital currency project with ramifications in the global financial sector to a kind of payment network linked to the local currencies where it operates.

Once the threat of Libra seems to have faded, the pandemic now increases the reluctance of many citizens to touch anything that has passed through other hands, even money.

But it is not just the coronavirus.

The trend already came from before.

The value of transactions carried out with cash in the euro zone went from 54% in 2016 to 48% in 2019, according to data from the ECB.

“Our role is to ensure trust in money.

That means making sure the euro is ready for the digital age.

We have to be prepared to launch a digital euro if the need arises ”, said the president of the eurobank, Christine Lagarde.

Once the more radical models of the digital euro that could become an added problem for the already battered European financial sector have been discarded, Spanish banks await the ECB's plans with expectation.

Sources from the Spanish Banking Association say they welcome the projection of a complementary instrument to cash and current bank money.

“And that the private sector can, based on it, offer new value proposals.

We value positively that the role that the private sector would have in the provision of auxiliary services and in accessing the digital euro, which would preferably be carried out through supervised entities, should be highlighted ”, add these sources, who also value the conception of a possible euro digital "as a means of payment accessible throughout the euro zone and not as an investment asset".

Despite the prudence with which the ECB approaches the debate, the dangers of such an instrument are many.

Panetta himself cited them last week: technical risks (due to the possibility of cyberattacks and the protection of privacy) and related to their possible impact on bank activity, financial stability and monetary policy.

“In a banking crisis there could be a deposit flight from a country with a single click.

The risk is that digital currency becomes a vehicle for financial panic.

That is why it is important for the ECB to analyze all the consequences before taking the step ”, summarizes Fernández de Lis, who estimates a“ reasonable ”period of time to move forward with the digital euro.

The euro zone is already lagging behind in the battle of digital currencies.

China has taken the lead, and wants to present a project in February 2022, coinciding with the Winter Olympics in Beijing.

Countries like Sweden are also more advanced.

“It is more important to tackle this phenomenon well than to do it first.

And addressing it well means not only looking at the potential benefits of a digital currency but also its risks, "said this month at an IMF event the president of the US Federal Reserve, Jerome Powell.

“The prospect of central banks like those of China or Sweden launching their own digital currencies has accelerated the ECB's plans. Whether or not it finally comes to light will depend, among other factors, on whether the lower use of cash is consolidated. Some central banks are concerned that the means of payment depend on a few foreign companies, such as Visa or Mastercard. Monetary sovereignty plays a fundamental role. It is also a question of prestige before the population: no central bank will want to be the last, ”concludes the head of Regulation at BBVA.