Last week\u2019s edition of the On the Money newsletter was accidentally reissued earlier today due to a technical error. Please enjoy today\u2019s edition below.<\/p>\n
Ireland might find itself presiding over the formal establishment of the much-discussed digital euro when it assumes the presidency of the council of the European Union<\/a> later this year. <\/p>\n And while consumers won\u2019t be able to actually use the virtual currency until the end of the decade at the earliest, the latest shake-up in how money works is likely to have long-term consequences. <\/p>\n So why is it happening? And what does it mean for you? <\/p>\n Can we start at the beginning? What is the digital euro and when can I spend it?<\/p>\n You can\u2019t spend it yet, that\u2019s the first thing we should say. And as for what it is, we\u2019ll leave it up to the powers that be to explain. \u201cThe digital euro, to keep it as simple as possible, is digital cash,\u201d European Central Bank<\/a> president Christine Lagarde<\/a> has said. \u201cAnd cash is the remit of the central bank. The anchor of our currency is central bank money. If the world is going digital, central bank money should go digital\u201d.<\/p>\n But what does she mean by that?<\/p>\n Once it is up and running the digital euro will give consumers across the EU a virtual wallet to make instant payments and transfers to anyone in the euro zone.<\/p>\n Can we not do that already using banking apps?<\/p>\n We can, but what will make the digital euro stand apart is that it will be backed directly by the ECB and free from the control of commercial banks, US credit card companies and big tech giants.<\/p>\n And does that matter?<\/p>\n \u201cWe are highly dependent on international [payment] solutions,\u201d Martina Weimert, chief executive of the European Payments Initiative, a consortium of 16 European banks and financial services companies, noted earlier this year. <\/p>\n \u201cYes, we have nice national assets like domestic [payment] card schemes … but we don\u2019t have anything cross-border. If we say independence is so crucial and we all know it\u2019s a timing issue … we need action urgently,\u201d she said.<\/p>\n Where will this ECB-backed virtual money come from?<\/p>\n It will come from you. This is not free money and the cash you have on deposit is what will become the digital euro. You will set up a digital euro wallet on your phone using your existing bank account and then \u2013 if you so choose \u2013 load that wallet with cash taken from your bank account.<\/p>\n If we drain our existing accounts won\u2019t that lead to a run on the banks? <\/p>\n The ECB has a plan for that and will most likely place a limit on how much money people will be able to have in their digital wallets at any one time. The rules are not in place yet but the rumour is that the most anyone will be able to place in their digital wallet will be \u20ac3,000. <\/p>\n So what would happen if everyone in Europe took \u20ac3,000 out of their current account and lodged it in their digital euro wallet? <\/p>\n The ECB has run simulations, and if everyone with a bank account in Europe moved money from their traditional bank accounts to their digital euro wallets in the event of an enormous crisis, a \u20ac3,000 cap would mean only \u20ac700 billion would be drained from commercial bank accounts.<\/p>\n Only \u20ac700 billion? That is an enormous amount surely?<\/p>\n It is, but it works out at about 8.2 per cent of all retail deposits in just over 2,000 banks across the euro zone.<\/p>\n This all seems very complicated and driven by a fear of losing control. What is the problem with that? <\/p>\n As it stands, Visa and Mastercard \u2013 both US companies \u2013 handle more than 60 per cent of card payments in the euro zone and virtually every single cross-border transaction. Other big players in the virtual money world include Apple and PayPal, which are also US companies.<\/p>\n But hasn\u2019t that always been the way? Why is it suddenly a problem now? <\/p>\n In times past it did not make much difference, but the current occupant of the White House has an approach to Europe, finance and global trade that is in equal measure belligerent, flaky and confusing. The ECB feels it has to act fast to protect its financial structures from whatever might come next.<\/p>\n What is happening now?<\/p>\n In March, EU leaders agreed to put the necessary legislation in place for the digital euro to come into effect by the end of this year. That is why Ireland, which holds the EU presidency for the last six months of the year, will be front and centre when the laws are being drafted. <\/p>\n What do traditional banks make of it all?<\/p>\n European banks are not best pleased. \u201cThe retail digital euro, as currently designed, disrupts this balance by turning central bank money into a direct competitor of commercial bank money,\u201d French Banking Federation chairman Daniel Baal said at an event last month.<\/p>\n And what is Ireland saying?<\/p>\n The Central Bank\u2019s deputy governor, Vas Madouros, has a different view. Speaking on RT\u00c9\u2019s This Week recently, he described it as an \u201cevolution of money\u201d and outlined the positives. \u201cThe digital euro would be free for basic use; it would be available both online and offline; it would be available for person-to-person transactions, online transactions, as well as at the shop; it will be designed explicitly with an inclusive mindset. This combination of factors doesn\u2019t exist at the moment, and it would exist with a digital euro.\u201d<\/p>\n Does the digital euro have any advantages for me? <\/p>\n One of the key things it will offer is security should things go pear-shaped. The cash will still be accessible even if you are not connected to the internet.<\/p>\n And why does that matter? <\/p>\n It would mean if some bad actors brought down our internet access, the buying and selling of goods would be able to continue. And the same would be true if the power grid or broadband network was brought down by bad weather. When Storm \u00c9owyn caused power cuts across Ireland last year, people who relied on cards and contactless transactions were left without the means to make purchases. The digital euro would offer at least some protection against such things happening again. <\/p>\n How is that possible if we are not online? <\/p>\n All your phone will need to do is be able to communicate with a payment terminal using near-field communication technology. That means access to the internet will not be necessary. Mind you, the two digital devices \u2013 your phone and the payment terminal \u2013 will have to be powered up, so there will still be problems if power is out for an extended period and you can\u2019t charge your phone.<\/p>\n Is privacy a concern?<\/p>\n It certainly is. All traditional online payments can been seen by the commercial banks and the central bank, even if the central bank does not know the identity of the users. Lagarde has said the digital euro will have to \u201cnavigate between these two imperatives: number one, making sure there is no money laundering, no financing of terrorism, and that the customer origin is well known. And number two, protecting the privacy of citizens. The promise is that the digital euro will be almost as private as banknotes \u2013 not quite, but almost as private as banknotes.\u201d<\/p>\n Is there anything else focusing minds in the ECB?<\/p>\n The loosening of the stablecoin market in the US is also a concern. <\/p>\n And before you ask, stablecoins are a type of digital token pegged one-to-one to a sovereign currency and backed by reserves such as government bonds. They are a little bit like cryptocurrency but much less volatile. The EU needs to move fast so US dollar-backed stablecoins do not dominate global commerce. <\/p>\n