Cash and payments
4.1 A digital euro would be the third form of the currency
The idea of a digital central bank currency has been brought up by researchers and central bankers in recent years. The Bank of Finland is participating in the Eurosystem work on a digital central bank currency that started in early 2020.
Electronic payments and digital money were a topical issue already over 30 years ago as the use of the Internet became widespread.
A variety of services related to electronic payments and digital money have been launched on the market, and the industry has grown rapidly. However, the bulk of services have been from commercial providers.
Thus far, no central bank in the world has provided a digital means of payment available to all, except for some short-lived experiments.
One of these experiments is the Avant money card developed by the Bank of Finland in the 1990s.
As the use of cash is decreasing, the Eurosystem has considered whether the central bank should also start issuing a digital means of payment, i.e. a central bank digital currency (CBDC).
Despite the term ‘central bank digital currency’, a digital euro would not be a new currency but a digital form of the euro.
A digital euro would complement euro banknotes and coins
Central bank money is money that is issued by the central bank and recorded under liabilities on the central bank's balance sheet. For example, a banknote is central bank money, whereas a customer deposit with a commercial bank is not.
The proposed digital central bank currency for the euro area is referred to as the digital euro. A digital euro would complement euro banknotes and coins.
Central bank deposits have already for a long time been a form of digital central bank currency, as they exist only as bookkeeping entries in IT systems.
A digital euro has nothing to do with virtual currencies – neither technically nor otherwise.
What would be the benefits of a digital euro?
Finland is one of the leading countries in the changing payments landscape as nowadays cash payments are quite rare here. As a result of this trend, i.e. the decline in the use of cash as a means of payment, an increasing share of retail payment services throughout Europe are provided by commercial entities. This is not necessarily a problem – at least not during normal times.
The Eurosystem must, however, ensure the smooth operation of payment systems also in exceptional circumstances.
If the central bank were to provide a retail payment system alongside current systems, it would increase the resilience of the financial system.
If one system were to fail, there would be a backup system to provide operational continuity.
A digital euro would be provided by the central bank. Electronic payments would therefore not be dependent only on commercial providers.
One of the benefits of a digital euro is that central bank money could be used for making not only interbank payments but also other electronic payments. Thus far the Eurosystem has provided central bank money in two forms: in cash to the general public and as a deposit facility to banks.
A digital euro would be, alongside banknotes and coins, a third form of the euro that would combine the features of the current forms. It would resemble central bank deposits as it would be an intangible asset. On the other hand, it would be similar to cash as it would be available to everyone.
Many open questions on a digital euro
Thus far the digital euro exists only as an idea.
In the years to come, the Eurosystem, and the Bank of Finland as one of its members, will explore the key open issues concerning the initiative. As part of this work, the Eurosystem will also launch practical experimentations on a digital euro.
The issue will be examined thoroughly before considering any decisions on the issuance of a digital euro. This is very broad issue and there are still many open questions.
The key questions relate to financial stability, the impact of a digital euro on the balance sheet of the banks and the central bank, as well as on the transmission of monetary policy.
There are also open legal issues. It is still unclear how a digital euro would fit into the current legal framework or what legislative changes the issuance of a digital euro would require.
Questions concerning protection of privacy must also be considered carefully. A digital euro should not facilitate money laundering. At the same time, citizens’ privacy must be protected.
The Eurosystem wants to lead the change
The examples above show that a digital euro is first and foremost not a technological issue. This even despite the fact technological advances and digitalisation are the reasons why we are discussing a digital euro.
The design of a digital euro would be based on the latest technical solutions and best practices. They could well be the same as are already widely used in commercial payment applications.
Electronic payment is a key part of everyday life, and its share in payments will continue to grow. If the objective is to ensure that in future, too, payments are executed in central bank money, the Eurosystem must be part of the change, if not actually the creator of the change.
The preparations made in 2020 have laid the foundations for a significantly shorter transition period for the possible introduction of a digital euro. The objective is to ensure that the Eurosystem is ready for the change when the time comes.