Digital euro is a proposed digital currency or a digital form of euro that would be issued by the European Central Bank (ECB). It would be a digital equivalent to cash which would give people an additional choice on how to pay, complementing existing currency options.

Need of digital euro

To provide a safe and secure alternative to cash: Cash has been around for centuries, but it is also vulnerable to theft and counterfeiting. However, its use has been declining in recent years due to several factors, including the rise of electronic payments and the increasing use of mobile phones. As a result, there is a growing need for a digital currency that can provide the same level of convenience and security as cash, but with the added benefits of being electronic.

To promote financial inclusion: Not everyone has access to traditional banking services. A digital euro could help to make financial services more accessible to people who are currently excluded. It could help to promote financial inclusion by making financial services easily accessible. Being a digital equivalent to cash, people could use it to make payments and store their money without having to go through a bank.

In addition, a digital euro would be more secure than cash because it would be difficult to counterfeit, and it would be easier to track transactions. This would make it a safer option for people who are concerned about the security of their money.

How could it work?

The ECB is still in the early stages of its assessment into how it would work. However, there are a few possible scenarios:

Central Bank Digital Currency (CBDC): A digital currency that is issued and regulated by a central bank. It would be stored and managed by the ECB, and would be accessible to people through a digital wallet or app.

Retail CBDC: For use by individuals and businesses. It would be similar to cash and could be used to make payments in person or online.

Wholesale CBDC: Designed for the banks and other financial institutions. It would be used to settle payments between banks and would not be available to individuals or businesses.

Impact on trade

Benefits:

Increased convenience and efficiency: Digital euro could increase the efficiency of cross border transactions making it easier and faster for companies to transact with each other and with businesses in other parts of the world. This could lead to increased trade and economic growth.

Reduced costs: This system could reduce the extra charges associated with making payments, such as fees charged by intermediaries during domestic as well as during the export-import transactions thus saving the money of businesses and consumers.

Increased competition in the payments market: The new currency could lead to increased competition in the payments market, as businesses and consumers would have more choices when it comes to how they make payments. This could lead to lower prices and better services for consumers. Also, it could encourage new businesses to enter the European trade leading to economic growth in the European Union.

Enhanced resilience of the financial system: It could help to enhance the resilience of the financial system by providing a more secure and stable alternative to some of the more volatile private digital currencies. For example, the digital euro would be backed by the full faith and credit of the ECB, which would make it more stable than some of the more volatile private digital currencies.

Risks:

Increased risks of cybercrime and fraud: Transacting digitally could increase the risks of cybercrime and fraud, as it would be stored and transferred electronically.

Monetary policy risks: If too many people hold digital euros, it could make it more difficult for the ECB to control inflation. This is because these are a form of electronic cash. They are not subject to the same regulations as traditional bank deposits. This means that people could hold large amounts of these in their wallets, which could lead to an increase in the money supply. An increase in the money supply can then lead to inflation.

To mitigate this risk, the ECB could impose limits on the amount of digital euros that people can hold. The ECB could also charge interest on the same, which would make them less attractive as a store of value.

Ending Note

The proposal of a digital euro by the ECB represents a significant step towards integrating advanced technology with traditional finance. While its potential benefits are vast, offering convenience, enhanced security, and increased financial inclusion, it also brings its own set of challenges, particularly in terms of cyber security risks and potential implications on monetary policy.

If successfully implemented, the digital euro has the potential to shape the future of the European economy, redefining how transactions occur and enhancing the efficiency of trade across the continent. Nonetheless, its advent signals the beginning of a new era of scrutiny, debate and refinement in a journey towards the digital future of money.