Discover the EU’s answer to crypto: the e-euro

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In a bid to catch up with tech companies and younger generations of consumers, central banks are finally starting to take digital currencies seriously. Countries like Sweden, China and India have established pilot digital currencies, e-krona, e-yuan and e-rupee respectively through their central banks. In the financial industry, these are referred to as Central Bank Digital Currencies (CBDCs).

The focus, scale and status of these efforts vary widely. In Sweden, the aim is to study the potential transition from banknotes to a digital currency, and the e-krona remains in the starting blocks. In China, the digital renminbi began to roll out in 2020, and its aim is to allow the state to better control the retail economy. India launched an electronic rupee pilot project in 2022 and its aim is to facilitate a wide range of transactions. Meanwhile, the United States is exploring the potential repercussions of establishing its own digital currency.

In the same vein, the European Union is currently considering launching its own digital currency, the e-euro. As the European Central Bank (ECB) explains, this would provide a digital alternative to existing payment methods with the aim of increasing the security and stability of the EU monetary system. The e-euro would be held in digital wallets, with transactions facilitated by the use of blockchain.

A crucial difference between the e-euro (a CBDC) and cryptocurrencies is that its overall quantity in circulation would not be capped. Because bitcoins and other cryptocurrencies are not issued by central banks, the number in circulation is limited by the fact that creating new ones requires mining, an energy-intensive process that involves solving extremely complicated mathematical problems. This is not the case with the e-euro, as it would be regulated by the European Central Bank and linked directly to the euro itself, there will be no exchange rate, it would simply be the euro in another format.

Although there is a superficial similarity between the e-euro and stablecoins cryptocurrencies whose value is pegged to a major currency, the e-euro would be issued and controlled by a public entity. This will ensure valuation and regulatory stability.

The case in favor

The million dollar question is why the ECB would consider a digital currency. Although we have all known physical currencies for centuries, digital currencies have certain advantages:

Less resource intensive. A central bank digital currency does not require printing, validation, circulation, monitoring and replacement, and would therefore have a significantly reduced environmental footprint. The fact that it will be emitted rather than mined adds to its energy efficiency. The International Monetary Fund estimates that a CBDC payment system for clearing and settlement could use hundreds of thousands of times less energy than physical currencies and cryptocurrencies while maintaining low transaction costs.

Increased banking access. Because a digital euro would be directly managed by central banks, it would eliminate the need for intermediaries such as private financial institutions. It therefore has the potential to reduce economic exclusion, as in the case of unbanked low-income people without bank accounts. The ECB would create and maintain the necessary infrastructure, making the electronic euro available to everyone. For example, while private institutions would require a minimum credibility score to open an account, governments could facilitate access to money by opening digital wallets as part of a social policy program.

economic sovereignty. It can protect the Euro from competing CBDCs and other cryptocurrencies and thus defend Europe’s economic sovereignty. It will also allow governments to control transactions and thus reduce tax evasion and money laundering.

Where a digital currency is leaving central and commercial banks

Given the potential benefits of central bank digital currencies, what is holding countries back? It all depends on how CBDCs are designed and implemented, and some challenges that might overshadow any potential.

Push back on private digital currencies. Imagine a world where private digital currencies like bitcoin or Facebook’s Libra become the medium for a substantial part of global financial transactions. In this world, the value of the medium of exchange would be entirely determined by supply and demand or by private enterprise, for example, Facebook itself. The introduction of CBDCs would allow central banks to determine the value of the currency themselves and thus help to ensure the monetary sovereignty of their country. People will still be able to choose between national currencies or those backed by private companies, but with the e-euro, Europe will at least be on a level playing field.

Balancing security and confidentiality The basic principle of tangible money is anonymity. In its monetary form, money can be exchanged for goods or services without necessarily disclosing its identity with each transaction. A fully secure digital currency would require all transaction information to be reported to authorities, while a fully private currency would not disclose any information. The former would give too much power to central authorities, while the latter would encourage tax evasion and other nefarious behavior. Blockchain traceability can help trace the full financial history, but should the actor’s identity be public information? The e-euro is likely to operate in a semi-anonymous format to maintain a balance between security and confidentiality.

More stability, less speculation. The initial idea of ​​digital currencies was that they would become decentralized means of exchange, governed by the forces of supply and demand. However, they quickly became speculative assets, prone to dizzying spikes and brutal crashes. Instead, a major currency should reflect conditions in the real economy rather than speculation about its future state.

So, is the e-euro something we need or want? It depends on how it will be designed and regulated. For this particular company, given the complexity of European regulations, the devil is in the details.

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