The ECB wants to be your other bank

Christine Lagarde, President of the ECB, who is considering launching the digital euro from 2026.Frank Rumpenhorst / dpa / picture alliance via Getty I

The digital euro opens unexplored paths to the financial world.

The European Central Bank (ECB) announced its launch at the end of July no earlier than 2026, starting from now on an investigation process that will last for three years.

At the moment, there are no great certainties about the European digital currency that was born in response to the massive use of electronic money - increased by the covid-19 pandemic - and the threat of private initiatives such as Facebook, with its 2.4 billion users , to launch its digital currency (diem), as well as the competition in this field from countries such as China and Sweden, among others, which are already doing real tests with their digital currencies.

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They have little to do with cryptocurrencies such as bitcoin and its very long list of replicas, which have not been consolidated as a means of payment and whose value fluctuates at the mercy of the markets. A digital euro will be the same as a physical euro and will be issued and supported by the Eurosystem (ECB and national central banks) that all citizens and businesses will be able to use. It is not intended to replace the physical euro, but to complement it with its advantages of speed, security and low transaction costs.

One of the main keys is where citizens or companies will have these digital euros: in banking in general or in the ECB itself. Luis Fernando Utrera, deputy director of the master's degree in Stock Market and Financial Markets at the IEB, points out that the digital currencies of central banks (CBDC) will democratize the use of the central bank because they will offer refuge when someone wants to transfer their money from one traditional bank account to another under the umbrella of the central bank (the ECB in this case). "What can be as good as dangerous: competition with banks, disintermediation that would disrupt the balance between deposits and loans, and potential volatility in difficult to manage balance sheets. In extreme cases, CBDCs can lead to a rethinking of the global financial system ”, he explains.

To prevent the money from bank deposits from ending up converted to digital euros, Fabio Panetta, a member of the central bank's executive committee, has suggested that a limit of about 3,000 digital euros be established that anyone can have, or that types of deeply negative interest rates above that level to discourage large accumulations of digital currency in cases, for example, of banking crises. But it seems clear that digital euros could be deposited with the ECB. Something that is still to be decided, but that reflects the

Report on a digital euro

, published in October 2020 and in which it summarizes the Eurosystem's vision for a Community digital currency, which would be a liability of the ECB, in digital format, as a complement to current cash and deposits and for use in retail payments.

Something that the Spanish Banking Association (AEB) is not so clear about. Its spokesman, José Luis Martínez Campuzano, explains: "In principle, it will be a complementary instrument to cash and current bank money, so that the private sector can, based on it, offer new value proposals." And he adds: “Access to the currency would be done through supervised entities, as a means of payment accessible throughout the euro zone. For the ECB, financial stability is a priority, which involves guaranteeing the intermediation and financing of the banking sector and the transmission of monetary policy ”, he concludes.

Thus, the European Banking Federation (EBF) chaired by the Spanish Ana Botín recently asked by letter to be able to "collaborate closely" in this phase of investigation initiated by the ECB and expressed concern about the profound change that the new currency may represent for their businesses. .

A concern shared by Thibault Gobert, sales executive at Spectrum Markets: “A centralized approach based on accounts provided directly to retail clients by the Eurosystem would not be smart, as it would significantly disrupt the activities of commercial banks,” he concludes.

Anonymity

Another of the unknowns that the digital euro raises is whether or not it will be anonymous, taking into account that currently cash is.

Roberto Scholtes Ruiz, strategy director for UBS in Spain, sees a promising future for CBDCs, which will end up imposing themselves in financial and economic transactions.

But he wonders if the information accumulated by

blockchains

(tamper-proof record book) will be anonymous or can be used by tax or judicial authorities.

And this decision is key to compete with other electronic currencies such as

stablecoins

(currencies designed to trade with less fluctuations) as well as volatile cryptocurrencies.

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For Scholtes, “unless the digital euro has great disadvantages from the point of view of privacy, the type of cryptocurrency most directly threatened will be

stablecoins

, while some of those with fluctuating prices could maintain some relevance as speculative assets and concealment of funds ”.

An issue that is of great concern in this phase of the ECB's investigation so as not to turn the digital euro into a financier of illicit activities or to hide wealth.

The latest doubts about the digital euro point to the investor and whether this currency will have interest rates different from those of the normal euro.

Raúl López, manager of Coinmotion Spain, does not believe that the digital euro will become an investment product, rather it should be seen as an evolution of the current means of payment in Europe.

Digital bonds

On April 28, the first step was taken in Europe with the digital euro through a digital bond issue.

This is explained by the director of investments in Spain of UBS with the issue carried out by the Bank of France, through a consortium of banks.

They were 100 million euros, issued by the European Investment Bank (EIB), maturing in two years, AAA rating and 0% coupon.

The blockchain platform used was Ethereum (which will keep the record of property and transactions), but the bond is denominated in euros and not in the cryptocurrency of the same name.

The Bank of France, which has received and has deposited the real money of investors, was the creator of the digital euros, which passed through the electronic wallets of intermediaries and the EIB. “Subscribers have their token (unit of value issued by a private entity), which certifies their possession. This is how the vast majority of transactions will be in a few years ”, predicts Roberto Scholtes.