Staff of Reuters Read for 4 minutes Reuters – FRANKFURT (Reuters) – The European Central Bank is expected to approve a multi-year effort to establish a digital version of the euro on Wednesday. The European Central Bank’s (ECB) headquarters in Frankfurt, Germany, on March 12, 2016. REUTERS/File Photo/Kai Pfaffenbach The digital euro, which is an electronic version of banknotes and coins, will most likely be a digital wallet that euro zone citizens can keep with the ECB. It’s part of a push by central banks to fulfill rising demand for electronic payment methods and combat the rise of private sector digital currencies such as Bitcoin and Facebook’s planned Diem. So far, here’s what we know: WHAT IS THE DIFFERENCE BETWEEN A DIGITAL EURO AND A REAL EURO? It will be a form of payment that offers holders a claim against the European Central Bank, similar to banknotes and coins but in digital form. It will most likely resemble a digital wallet or online bank account owned directly by the ECB rather than a commercial institution. Because the ECB cannot run out of euros, its digital currency is inherently safer than any private sector alternative. IS IT POSSIBLE FOR ME TO CONVERT ALL OF MY SAVINGS TO DIGITAL EUROS? Almost certainly not. The ECB recognizes that the security of its digital wallet may make it so enticing that conventional banks may be forced to close. As a result, it will either impose a limit on the number of digital euros an individual can acquire – say, 3,000 euros ($3,543) – or impose a penalty rate on holdings beyond a particular threshold. THEN WHAT IS THE PURPOSE OF A DIGITAL EURO? The ECB does not want to leave digital payments to the private sector, especially if, as in Sweden, physical currency usage begins to decline. It has expressed worries about the fact that the euro zone’s largest payment service providers, such as Visa and Mastercard, are based outside the EU, as well as the usage of transaction data by private corporations. After Facebook announced ambitions to launch its own currency in 2019, work on a digital euro quickened, posing a potential challenge to central banks’ core business. HOW DO YOU EVEN OPEN A CENTRAL BANK ACCOUNT? The ECB has stated that it will delegate this responsibility to banks and select regulated fintechs, who will subsequently provide clients with digital euro wallets on its behalf. CAN DIGITAL EUROS BE SPENT IN ANONYMOUS OFFLINE TRANSACTIONS, JUST LIKE CASH? Only for modest sums of money, maybe less than a hundred euros. The ECB must strike a compromise between privacy and combating money laundering and tax evasion. WHEN ARE WE GOING TO BE ABLE TO SPEND OUR FIRST DIGITAL EURO? Not for at least the next five years. The ECB has given itself two years to complete the design of the digital euro. It will next have to be ratified by the Governing Council. The ECB will work on implementation for another three years if approved before launching. It will also seek legal reforms, as the EU treaties do not allow for a digital euro. WILL PHYSICAL CASH THEN BE EXPIRED? The ECB claims that the digital euro will supplement rather than replace cash. According to an ECB survey, cash accounted for 79 percent of all payments at point of sale in the euro zone in 2016. However, some critics fear that the ECB would eventually abandon cash in favor of the digital euro, allowing it to execute harsh monetary policy measures such as negative interest rates on household savings or direct cash transfers. WILL BLOCKCHAIN BE USED IN THE DIGITAL EURO? The use of Blockchain, the Distributed Ledger Technology (DLT) that underpins cryptocurrencies, is a possibility, but not the most likely. ECB board member Fabio Panetta stated that, unlike the ECB’s normal immediate payment system, TIPS, there was “no experience” with a DLT that could service the needs of hundreds of millions of users. The ECB, on the other hand, may utilize a combination of the two, according to Panetta. CAN IT BE BOUGHT OUTSIDE THE EURO ZONE? For homes in poorer nations, such as those bordering the EU, three thousand euros would be a significant sum of money. As a result, making the digital euro available to locals may drain deposits from local banks. Payments to and from the euro zone could become cheaper and safer if other central banks create digital currencies. (1 dollar = 0.8467 euros) Francesco Canepa contributed reporting, and Mark Potter edited the piece./n
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