Blog Inge van Dijk - Preparing the euro for a digital future

Digital payments have become the standard: we use our debit cards and smartphones, and or we send a payment request. It’s quick and easy, and it’s safe for retailers, who have less cash in the register. After COVID-19, only one in five in-store payments are made in cash. And we're not unique in this respect here in the Netherlands. Sweden, Denmark and the UK are also highly digitalised. By contrast, cash payments are still dominant in several other countries, including Germany. But across Europe, the use of cash is trending downward.  

Why is cash important? 

This decline of cash as a means of payment raises fundamental questions. What consequences does it have? What is the purpose of cash? Let's start with the main features of cash. First, the cash in your pocket is public money, because it is issued by a central bank. You withdraw it at the ATM or at your bank. Cash is also legal tender: you can pay with it anywhere in the euro area. Up to a certain amount, paying with cash is anonymous. Some people prefer cash precisely for this reason. Others prefer it because banknotes and coins are tangible, or because it helps them keep track of their spending.

No electronic payment method has these features. You can't feel your digital balance, and your transactions remain stored and visible in your bank environment for a long time. Also, the money you keep with your bank is not public money, but private money. This is why: The digital balance at your bank is called private money because the money is on the balance sheet of a private company – your bank. It can be converted one-to-one into public money: banknotes and coins. This convertibility of private money into public money is an important cornerstone of our monetary system, which in turn is at the heart of the confidence in our payment system. Additional safeguards are in place to protect society should something go wrong at a bank, where your private money is stored. For example, your digital bank balance is insured up to €100,000 under the Dutch deposit guarantee.

So why might we need a digital euro? 

As the use of cash has declined rapidly over the past few years, the availability of public money is under pressure. I do expect cash to be around for some time, but it may well disappear one day, and  making cash payments could prove to become more difficult. All in all it is only logical – especially in these times of digitalisation – that we look at whether we can make public cash money digital too. Having sufficient public money in circulation is the very bedrock of our money system.

But there is more to consider. COVID-19 and the geopolitical developments resulting from the war in Ukraine have made the risks of globalisation abundantly clear. A valid question is, who do we want to depend on when it comes to our key infrastructures: our energy supply, and also our payment infrastructure. If payments cannot be executed, trade almost immediately  comes to a halt, something that was clearly visible when sanctions were introduced against Russia. The processing of our payments should never fall prey to the whims of a foreign power or a bigtech. As such, we are also exploring the digital euro because of our stronger need for European autonomy.

A banknote, but a digital one

I see the digital euro as a digital version of a banknote, with as many features of cash as possible. Redeemable anywhere, anytime, accessible to all and easy to use. For payments from me to you, for payments in a shop, but also online throughout the entire euro area. Like banknotes and coins, the digital euro will be issued by a central bank, which makes it safe. Your digital euro balance will be guaranteed by the central bank.

The idea is not to create a fancy new payment product to replace the payment solutions offered by market players. A digital euro should be seen as an additional means of payment, which you get from your bank. It is a basic means of payment in addition to what you already have in your wallet. Alongside your cash, because that has not gone yet. And alongside your other payment methods, such as contactless payments with your smartphone or debit card.

Privacy will be safeguarded

A key concern is ensuring privacy, which is complicated with a digital payment solution. We are exploring whether digital payments below a certain amount can remain private, which will require adjustments to anti-money laundering laws. Let me say right away that it’s simply not true that the government can view the payments you make with digital euros. The reports circulating about this are utter nonsense. Even at the central bank, responsible for issuing the digital euro, we will not and do not want to have access to consumers' payment data. Privacy is matters a great deal, and fortunately it is firmly enshrined in our laws.

To rule is to prepare for the future. When it comes to payment systems, that means to prepare well in advance, because investments in solutions that need to be accessible to all are always substantial and take time. Designing the digital euro - precisely in a market that functions well - is by no means an easy puzzle, which we are trying to put together with all of the central banks in the euro area. But that is the task we face, so that we are prepared for the future. A future in which the autonomy and continuity of our payment system is secured. We’ll know more by late 2023.