Cash - soon only digital?

Cash - soon only digital? © Jonas Leupe / Unsplash

E-Euro as Digital Central Bank Money

The European Central Bank is currently thinking out loud about how to proceed with regard to a digital euro. The "paperless cash" is intended to supplement or perhaps completely replace cash as we know it in the future.

What is the current situation regarding cash?

The Russian writer Dostoyevsky wrote: "Cash is coined freedom!" And indeed, cash is a straightforward way to conduct business without the involvement of third parties, without any monitoring, and without any other tools or prerequisites.

Nevertheless, our cash seems to have been on the blacklist of politicians and central banks for years. In the course of the fight against money laundering and terrorist financing, for example, EU regulations ensure that the anonymous use of cash is increasingly restricted. As recently as the beginning of 2021, new discussions arose again about limiting cash payments within the EU in general to a level of 10,000 euros. In many EU countries, cash limits have long been a reality. In France and Portugal, for example, only a maximum of 1,000 euros may change hands in cash and anonymously.

E-Euro as a state Bitcoin?

Bitcoin
Image credits: Own work

Digital money is not a new idea, of course. Bitcoin and other cryptocurrencies have been making headlines for a few years now. Over the past year, the importance and prices of these virtual currencies have risen to an incredible extent.

In addition, large investors, funds and companies are now also investing in digital currencies and already consider them a safe asset despite the large fluctuations.

With the e-euro, the ECB seems to want to jump on this bandwagon. In fact, however, it is not just a matter of "jumping on", but rather of gaining state control over this new form of money.

In addition to Bitcoin, Ethereum and other cryptos, states and central banks are also threatening to lose their monopoly on money to the big tech companies. They are also already tinkering with their own currencies. Facebook plans to launch its currency "Diem" (until recently called "Libra") in 2021.

That government-issued digital central bank money will come sooner or later should therefore be relatively certain.

One of the central attractions of cryptocurrencies has been the fact that they do not require any banks or other institutions, but instead bookings are made via a peer-to-peer network. And this is completely anonymous. With a digital e-euro, this would be different. The money would not be mined in a network, but issued centrally by the ECB. As the issuer, the central bank would then probably also have insight into all transactions that have taken place. Whether the same anonymity can prevail as with "real" cash payments is at least doubtful.

Of course, the costs can also be taken as an additional motivation for the central banks. After all, the production and supply of large quantities of cash also costs quite a bit. A digital version would probably be much cheaper in the long term.

What distinguishes a digital e-euro from cashless payment?

The payment process with digital cash at the checkout should not differ greatly from contactless payment by card or mobile payment.

However, the mode of operation behind it would probably be significantly different. Instead of ensuring bookings on the bank accounts of the buyer and seller, payment would be much more direct.

The digital cash would be stored as a "token" in a virtual wallet, e.g., on the smartphone, similar to cryptocurrencies. When paying, this token would then be transferred directly from device to device. This would eliminate the "detour" via the bank.

Instead, the information that a virtual euro has changed hands would be stored in a blockchain.

The euro is not a store of value

One problem that even digitization cannot solve is the following: Central issuance by the ECB would allow the money supply to expand quickly, even with a digital euro.
Only the money creation of the commercial banks, which is an important part of the system in the case of Giralgeld, would be omitted. This is different from Bitcoin, for example, whose maximum number is fixed.

It is true that digital cash - just like its analog counterpart - is unlikely to incur negative interest because it is not held in bank accounts. However, the euro, whether virtual or in the form of paper money, will not escape the general danger of inflation. The currency itself would continue to be the plaything of national or European monetary policy, and the danger of currency devaluation cannot be defused by the digitization of the euro.

Outlook

At present, a digital e-euro is still at the beginning of its development. It therefore remains to be seen what such a digital central bank money will ultimately look like.

Coins and bills must not be displaced by a digital euro. Because only real cash has no thresholds in use: everyone, whether 95 years old or 10 years old, can use it, whether the smartphone battery is empty or charged, whether the Internet connection is stable or not...

Digital cash can be useful as a supplement in everyday life. However, just like cash in general, it is not suitable as a store of value. If you want to preserve your assets over the long term and protect them from a loss of purchasing power, you should invest a good portion of your savings in gold, silver, and platinum. Because only these preserve their value for thousands of years and accepted everywhere and at any time.

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