More than 340 million Europeans carry euro banknotes and coins around as cash and pay in euro when they shop online.
One of the key ECB responsibilities, alongside its main objective of price stability, is to issue euro banknotes and to ensure the smooth functioning of payment systems.
But cash is not the same thing as an electronic payment: one is central bank money and the other is private money.
We all use both types of money all the time. But the difference is important when it comes to understanding the need for a digital euro.
The two types of money
Central bank money: The money that, as an example, the ECB create is called central bank money. The cash in your wallet or purse is central bank money. In fact, banknotes and coins are currently the only kind of central bank money available to the public.
Central bank money is also called public money because it is issued by a public institution – the central bank – and is therefore backed by the public sector.
Private money: Commercial banks also create money. This kind of money is called private money and includes the balance you see on your bank statement and the savings in your account. The payments you make with your debit or credit cards, or via an online payment service, are all transfers of private money, because you are using money created by your bank.
When you withdraw banknotes, you are converting the private money in your bank account into central bank money. Alternatively, you turn public money – say someone gave you a €20 banknote – into private money by depositing it at your bank.
Public money acts as an anchor for the monetary system. It is the reason why people can have trust in the value of the private money issued by banks. A business accepts a payment from your credit card because it knows that it can be converted into the same amount of central bank money.
The digital euro: bridging the gap
The ECB’s ambition is to combine the benefits of central bank money with how people use money and pay today. This would allow it to provide the eurozone with public money in electronic form, in addition to cash. The way to do this is a central bank digital currency: the digital euro.
Similar to spending the money in your bank account, you could use a card or a phone app to pay with your digital euro. But it would be central bank money, guaranteed and backed by the ECB.
Benefits of the digital euro
Introducing a digital euro could support digitalisation and help us to meet the needs and payment preferences of the public. Digitalisation can, in turn, contribute to economic growth.
Another benefit is that the digital euro would increase the resilience of the eurozone currency against unregulated technological developments in the banking and financial sectors – such as crypto-assets and alternative payment solutions that do not make use of major card schemes – which could undermine financial stability.
Bitcoin, Ethereum and other “cryptocurrencies” are not money
In recent years, we have seen many crypto-assets popping up all over the world, known as cryptocurrencies. This name is misleading though, as they don’t perform the three functions of money: a reliable medium of exchange, a store of value and a unit of account.
Moreover, these assets are not backed or managed by any central institution. You have no guarantee that you will be able to exchange them for money when you need to.
Even stablecoins, which try to offer less volatile digital assets using similar technologies, are not as stable as they claim to be. The value of a stablecoin is based solely on a promise made by a private company and we have all seen where that leads…
In addition to the slowness and high costs of transactions, stablecoin issuers are also not clear on how you can use them; and you certainly can’t use them to pay your everyday bills.
The need for a digital euro
Many people are shifting away from cash and towards new digital payments. The ECB see the digital euro project as a way to safeguard the role of public money as the monetary anchor and maintain the trust in its currency.
Issuing a digital euro would allow it to strengthen the monetary and payment system. It would allow everyone to use public money to make safe payments anywhere in the euro area.
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