Does anyone want a digital euro?

This is an audio transcript of the Behind the Money podcast episode: ‘Does anyone want a digital euro?’

Michela Tindera
Do you remember Facebook’s crypto project that was called Libra from a few years ago?

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What if we made money truly global, stable and secure? What if everyone was invited to the global economy with access to the same financial opportunities?

Michela Tindera
At the time, in 2019, it made a pretty big splash.

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Facebook going full crypto unveiling its new digital currency, Libra.

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The Facebook plan? Replace the world’s dollars, euros, francs, yen and pesos with a new cryptocurrency.

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Facebook says this digital currency aims to make it as easy to send money around the world as it is to send a photo.

Michela Tindera
Martin Arnold is the FT’s Frankfurt bureau chief. He reports on the European Central Bank or ECB. And he says it wasn’t just the media that noticed Facebook’s new project.

Martin Arnold
And this was at a time when there was huge excitement about cryptocurrencies and bitcoin. Lots of central banks were quite worried about it, and the ECB was particularly worried about it and felt that there was a danger that if Facebook had a currency that everybody started to use, it could disintermediate the central bank and they could lose control of the money supply in Europe.

Michela Tindera
This would be a big deal, whether it was Facebook’s Libra or another type of cryptocurrency. Decreasing a central bank’s grip over the money supply could have major consequences.

Martin Arnold
Having control of the money supply is massively important because it allows a central bank to try and control inflation, to control whether economy is overheating or whether they need to be some kind of stimulus. It’s a massively important tool and it’s clearly a hugely important part of any country’s sovereignty.

Michela Tindera
Central banks around the world, from China to Nigeria to the EU, got to work making their own version of this. And they all came up with something that’s now called a central bank digital currency, which is basically a digital form of cash.

Martin Arnold
An electronic token, a digital expression of cash that is issued directly by the central bank in the same way that cash, the notes and coins that you hold in your pocket, represent the money that is issued by the central bank.

Michela Tindera
Libra was a wake-up call for the central banks. Martin says it made them realise that they needed to figure out a way to keep their link to the monetary system alive in this new digital era. But a lot has changed since then. The first is that Libra itself, well, it fell apart and so has enthusiasm for a lot of other cryptocurrencies.

Martin Arnold
But that did not stop the ECB and lots of other central banks around the world from continuing to pursue this idea for various other reasons.

Michela Tindera
And now today, in 2023, the ECB plans to launch a digital euro are still pushing forward. This summer, the European Commission is writing the legislation that will help create the digital euro. But even though enthusiasm for Facebook’s Libra project has subsided, a new challenge to the ECB’s leap into the digital age has presented itself from the very banks and people it hopes will one day use it.

Martin Arnold
So the idea of a digital euro has attracted quite a lot of questions and criticism from consumers, bankers and politicians over exactly what is it supposed to achieve and whether the risks outweigh the potential benefits.

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Michela Tindera
I’m Michela Tindera from the Financial Times. Today on Behind the Money, we’re looking at digital currencies and focusing in on one in particular: the digital euro. We’ll hear about the promises and the pitfalls of this project that keeps pushing forward.

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As Martin said, Facebook’s Libra project was a big part of what kicked off central bank’s plans to create their own digital currencies. But that wasn’t the only thing. It probably won’t come as a surprise that the amount of people around the world using cash on a regular basis is declining.

Martin Arnold
People are paying more with phones, even with their watches and using contactless payments and electronic payments. Cash is falling not only because people are shopping more online for things, but even in stores. People are paying more with cards. People have digital money already, obviously, where it sits in the deposit account at their bank.

Michela Tindera
I mean, when was the last time you used cold, hard cash? You know, paper notes or coins to buy something. But Martin says that the EU and the European Central Bank have specific reasons why they’re so focused on setting up a digital euro.

Martin Arnold
Europe doesn’t have its own payments champion in the way that the US has. Visa, Mastercard, PayPal, even Apple. And in this world of geopolitical tensions, there’s a discomfort about that. There’s a concern that Europe is too reliant on the US private sector companies for its payment system. And so the worry in Europe is we may well be on very friendly terms right now with the Americans, but you never know. And you know, should there be an issue, we don’t want to be completely a 100 per cent reliant on any other country for our payments infrastructure. And the hope is that were the ECB to issue this digital euro, it would provide an incentive and make it easier for European banks in particular to come up with some kind of national European champion, which could challenge the likes of Visa or Mastercard and be more of a European-based payments provider.

Michela Tindera
The exact designs for what a digital euro might actually look like aren’t ready yet. So for now, picture it like this. Open up your phone and look at the different banking and payment apps you have there now.

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This would probably just be one more like that.

Martin Arnold
What is this going to look like from my point of view as a consumer? Well, pretty much the same (chuckles) as the digital euros you’re already using. Now, it’ll probably sit in a separate wallet. Almost certainly will. It won’t just be intermingled with all your other digital euros. It’ll be separate because to give it its own identity and make it like a digital form of cash, this would be, you know, like you take the money out of your deposit account and put it into a wallet and you can then use that money.

Michela Tindera
In his reporting. Martin has come across some interesting potential use cases for a digital euro.

Martin Arnold
The ECB likes the idea of you being able to transfer digital euros even if you don’t have internet. So offline payments, you could do that in various ways using, for instance, Bluetooth technology. So from one device to the other, you wouldn’t actually have to have internet access to make that transfer. There’s some hopes also that it could help on cross-border payments that if enough central banks have launched their own digital currencies, that they could come up with a way of them being exchanged more easily. And so you could send money across borders quicker, more cheaply, more efficiently. That would make a difference because that is one area where it’s still quite clunky, quite expensive, quite difficult to transfer money between currencies of different countries.

Michela Tindera
While the ECB moves forward with its plans, there are sceptics that span many points of view.

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Michela Tindera
Earlier this year, a group of people gathered in Amsterdam to protest the digital euro.

Martin Arnold
So this was really strange to see people going out protesting in February in Amsterdam when it’s cold (chuckles) and getting exercised about something that really doesn’t even exist yet. So why were they doing that? And there’s a whole range of reasons that people who were on this march gave, all driven by suspicion and fear and conspiracy theories, basically. But a lot of it was around the concern about privacy. If you boil it down, people worry that by issuing this digital currency, it’s all part of an attempt to get rid of cash and therefore give the central bank and then and by extension, the government, greater ability to surveil and to scrutinise and control how people spend their money, what people spend their money on.

Michela Tindera
Now, this protest was only made up of about a thousand people. And you know, that’s a tiny pinpoint among the entire population of the EU. And it’s worth mentioning that the organiser of it also had led anti-vaccine protests during Covid. But the concerns brought up during this protest reflect a view held by a lot of people.

Martin Arnold
The main evidence that we have for what people think about the digital euro is this big consultation that was done by the ECB a couple of years ago and that came back with the finding that 40 per cent of people’s main concern about this project was on privacy. So that was the number one issue.

Michela Tindera
The ECB has said in response to these types of concerns that it plans to separate personal identities from payments that are made. So for example, the central bank wouldn’t be able to see if I sent my friend 50 digital euros for a dinner we had together the other night.

Martin Arnold
Now of course, you know, there is this whole suspicion that the reason people are so attached to cash is that it allows them to perhaps do things that are not completely above the board. So, for instance, they could use cash to buy some marijuana or they could use cash to pay for their builder and then avoid declaring that to the taxman. And so the suspicion is that governments and central banks are . . . they’re being, you know, kind of an extension of governments want to take away or reduce the importance of cash and switch to this digital currency where they would be able to track it and monitor it.

Michela Tindera
In cases where there’s a suspicion that something illegal is taking place, Martin says that law enforcement likely would be able to see the full picture. So whether it’s worries about privacy or even just explaining to the public in concrete terms how a digital euro would work, the ECB and other central banks are really struggling with how to communicate a winning message to the public.

Martin Arnold
And I think the problem that the central bank has is that they face criticisms from so many quarters and they’re yet to come up with a compelling use case that really wins people over to say, “Oh, yeah. Oh, that’s a great idea. I can see how that works. I can see why that would be a brilliant thing to have. I want to have a digital euro. I wanted it. It sounds great.” They haven’t got that. And all they’ve got is all these criticisms and the suspicions and these worries and these fears. And they just haven’t managed to kind of come up with this great use case yet. They can argue it for all the reasons why they as a central bank think it’s important. But why do we as consumers? Why would it be great for us? That is something they’re still struggling with.

Michela Tindera
Other countries have faced similar issues with public buy in. China’s run pilots for its digital currency, and it’s had little interest from its citizens. That’s likely because they already have access to digital payment giants like Alipay and WeChat. And it’s a similar story in Nigeria, which has seen little uptake in its own digital currency since it launched in 2021. And then there’s the private banking sector. That is any bank that isn’t a central bank. They also see problems with the digital euro.

Martin Arnold
Yeah. It’s again, a two-fold really concerns by the banks. And the first is very important issue, which is that banks say this digital euro will become a safe haven in a crisis and therefore make bank runs much more likely. The reason they say this is because if you think about it, a digital euro would be directly issued by the central bank. So it would be risk-free essentially because the central bank is not going to go bust. So your money would be basically guaranteed by the central bank if you have it in digital euros. If you have it in the bank account, most of the time that’s fine. But if a crisis hit, there was some kind of global financial crisis again and you might think, “Well, I’m a bit worried about what’s going on here and perhaps a bit worried about my bank and bit worried about the whole financial system. I’m just going to transfer my money into digital euros and then I know that it’s safe.” And if everybody does that, the banking system is going to fall over.

Michela Tindera
Now, the ECB says that wouldn’t happen because they wouldn’t let it. They could just limit how many euros people can hold at one time.

Martin Arnold
So they talk about €3,000. They talk about that a bit. It’s not definite it’ll be €3,000. But they would limit it so that there couldn’t be this massive outflow of money into digital euros. And that’s kind of addressed the problem. But people still worry that in a crisis there would be such political and public pressure to raise that limit that it could be, you know, what’s to stop them raising the limit at some point and then, you know, this problem would reoccur and even €3,000 if everybody took €3,000 out of the bank at the same time, that could make life very difficult for the bank still.

Michela Tindera
But there is another issue that banks have. While the ECB says that they’ll be the ones to issue the digital euros, it’s private banks that will be in charge of providing the infrastructure for consumers to actually use this new currency.

Martin Arnold
The day-to-day operations will be done by the banks. So the only way you’ll get a digital euro is through your existing bank. And the bank will have to do all the onboarding checks of customers. They’ll have to do all the know your customer, the anti-money laundering, all of these things will need to be done. So this extra work for the banks and they’re not convinced that they’re going to get paid for it. So obviously being banks, they don’t very much like that idea.

Michela Tindera
Because of these issues, the ECB finds itself in a bit of a predicament.

Martin Arnold
So there’s this Goldilocks problem where they want it to be quite successful but not too successful. You know, there’s just this feeling that by putting limits on a central bank, digital currency, you’re reducing a lot of the potential for it to be a success. And this comes back to this idea that actually central banks are torn with this project because they don’t want it to be a complete flop because that would be embarrassing if nobody used it and they invested a lot of money in launching it. But equally they don’t want it to be too successful either. Because if it’s really successful and everybody uses it and it’s, you know, everybody takes their money out of banks and puts it into their digital euro wallets, then it could undermine the banking system. And that could have a massive impact on financial stability.

Michela Tindera
So there are concerns from regular citizens and from the private banking sector. But the ECB seems determined to keep pushing ahead.

Martin Arnold
The ECB president, Christine Lagarde, who’s invested personally quite a lot in this, really got behind the project and been a real enthusiastic supporter.

Michela Tindera
Here’s Lagarde speaking about this recently.

Christine Lagarde
One of the reasons I have pushed our project of the digital euro has to do with the fact that our societies are becoming more and more digital, and we cannot just operate with central bank money comprised of banknotes, coins. And I’m convinced that we must be able to produce a digital central bank currency.

Martin Arnold
And she says that she thinks the ECB will be ready by in 3 to 4 years to decide whether to launch it, which means actually launching it, not then doing more preparatory work. But by that stage, the world could look very different.

Michela Tindera
Yeah, I mean, this is sort of an existential question here. But, you know, you’ve said that the central banks want to do this in order to maintain control of the currency. Who cares if . . . So, what if they don’t have control? What happens then?

Martin Arnold
Well, I think that there are people who are big supporters of cryptocurrencies and bitcoin and who have a very libertarian attitude to finance and money. And who would share that view, who would say, “Why should governments control money?” But I think for governments (chuckles) and for central banks, it’s very important because if they lose control of the money supply, then they lose control of a key lever for economic and financial policy. And I think it’s a key part of a country’s sovereignty to have control of its money. And so I think that governments and central banks will not give up on that easily. They certainly do not trust the private sector to do the right thing when it comes to controlling the money supply.

Michela Tindera
So where do you see this going?

Martin Arnold
So the next thing that’s going to happen in this process is the European Commission. So the lawmakers of the EU are going to produce draft legislation so that their first shot at legislative proposals, which will then kick off a whole debate and the lengthy process of debating and approving that law. And that law will be . . . is essential to enable the issuance of a digital euro. So it’s going to be really key to watch that process as that develops. I think in if it’s a five-chapter book, then we’re probably in chapter two. I think the action, the real, you know, guts of the story is still to happen. And the denouement, we’re still quite far from having any idea of who’s going to turn out to be the baddies and who’s going to be the hero of the story.

Michela Tindera
Behind the Money is hosted by me, Michela Tindera. Saffeya Ahmed is our producer. Topher Forhecz is our executive producer. Sound design and mixing by Sam Giovinco. Cheryl Brumley is the global head of audio. Thanks for listening. See you next week.