Our present time is characterized by profound transformation, exponential development and fundamental change. Above all, digital transformation through technologization is taking a dominant position. It is affecting all areas of life and is not stopping at the financial sector and currency. Basically, “electronic currencies” have been around for quite some time, just think of the international payment transactions of banks and terms like “Giralgeld”, which also allow for additional money creation. Currency plays a central role as the elixir of life for economic transactions, facilitating the exchange of goods, services and resources. It acts as a universally accepted medium of exchange that transcends barter systems and enables efficient trade on a global scale. Indeed, currency forms the backbone of our economic infrastructure.
Recently, the introduction of the digital euro, has been the focus of much discussion and analysis within the European Union. The digital euro represents an advance in the field of currency and finance. Unlike physical bills and coins, the digital euro would exist solely in digital form and be stored in electronic wallets and accounts. By integrating cutting-edge technologies such as blockchain or distributed ledger technology, the digital euro promises to ensure secure and transparent transactions. It opens a new frontier in the development of modern currencies and could even be equipped with programmable functions that enable smart contracts and automated payments.
Given the increasing digitalization of the economy and the financial sector, the move to the digital euro is seen as necessary to ensure that this development is managed efficiently and securely. The digital euro aims to leverage the advantages of the euro as a stable currency while providing consumers and businesses with a fast, secure, and cost-effective payment method.
Particular attention is being paid to payment security in the introduction of the digital euro. The European Central Bank (ECB) aims to ensure that the digital currency is at least as secure as the physical euro. To this end, the digital euro will be built on a secure infrastructure and equipped with advanced security measures to prevent manipulation and fraud. Blockchain technology or distributed ledger technology offer revolutionary security systems that can help increase payment security within the European Union. This could also reduce the use of cryptocurrencies such as Bitcoin and other virtual currencies, which are often associated with fraudulent activities.
However, there are also some challenges and potential difficulties with the introduction of the digital euro. One potential consequence could be an increasing reliance
on digital payments and related infrastructure. In this case, a targeted but also untargeted disruption of electronic payments, through e.g. cyberattacks, operational disruptions or natural disasters, could have a severe impact on the economy and consumers. This would pose a risk to financial stability and undermine confidence in digital currency. In addition, the traceability of transactions and the resulting limited privacy is often criticized, as some consumers have concerns about governments monitoring their transactions. In addition, the Russia-Ukraine war has changed the view of intense economic interdependence, as Burkhard Balz, a member of the Deutsche Bundesbank’s Executive Board, noted in a presentation delivered at Andrássy University in Budapest. Trade, he said, is no longer a guarantee of peace, and too much dependency, including and especially with regard to critical infrastructure, could pose significant problems.
Despite these potential challenges, the digital euro is expected to bring numerous benefits, including above all the reduction of transaction costs and the facilitation of cross-border payments. Much has already happened since the launch of the “Investigation Phase” in October 2021, and the goal and standards of a digital euro have been further elaborated. This year’s goals for 2023 include the development of compensation models, access to the digital euro ecosystem, prototype results, completion of user requirements, and preparations for the project implementation phase. In addition, a decision document will be prepared with advice on the possible issuance, design, and implementation of the digital euro. In October 2023, the next milestone is due, namely a decision by the Governing Council on the possible launch of the next phase. In the next phase, the ECB would further develop and test the technical solutions and business arrangements. A possible Governing Council decision on the issuance of a digital euro would be taken only after the adoption of the legal act.
Overall, the digital euro is expected to be an important step toward a digitized economy and a secure payment environment. It will usher in a new era of digital transformation and offer a wide range of benefits and opportunities. The efficiency of the digital euro would revolutionize the way we conduct financial transactions, making our daily interactions smoother and more accessible by leveraging modern technologies. This offers the potential for more programmable features and smart contracts, providing a multitude of opportunities for financial innovation and automation. As the world becomes increasingly interconnected and digitized, the digital euro is a forward-looking and indispensable step toward a more inclusive, efficient, and resilient financial future. However, the ECB must ensure that the digital euro is secure, reliable, and beneficial to all stakeholders.
Ultimately, the introduction of the digital euro should take place in at least two phases in order to do justice to its dual focus. In the first phase, the immediate impact on capital markets, banking systems and their business models must be carefully assessed and managed. The introduction of the digital euro could lead to changes in financial behavior and alter the dynamics of money management and investment strategies. Banks and financial institutions may need to adapt their services and infrastructure to accommodate the new digital currency. At the same time, the second phase must focus on understanding the broader implications for financial transactions involving non-financial firms, governments, and households. The introduction of digital currency will change the way transactions occur across sectors and introduce new payment methods and business models. The non-financial industry will need to integrate the digital euro into their operations, while governments will need to address the regulatory and legal implications.
We would like to thank the author, Fabio De Santis Gomez, for participating at the United Europe Mentoring Program (Class 2022/23).
