Digital currency: Central Bank Digital Currency?

Cash is dead, long live cash!

Cash, that’s always been there, hasn’t it?

For a large proportion of European consumers, there is no more commonplace activity than exchanging goods for money in any form. This natural behavior  makes it clear that many are no longer aware of the origin of the euro, or of its journey since its creation. This is remarkable, especially since the last currency reform, which resulted in the abandonment of national currencies such as the German mark or the Dutch guilder, was only 18 years ago. Now that the ECB is discussing a no less radical reform of the European monetary area, a little refresher of our opinion is in order.


Cash and the evolution of payment

Cash or the physical value of national currencies, as well as the associated purchasing and exchange power, has undergone various stages of evolution since its introduction. After the first transactions carried out as barter deals, it quickly became clear that a value independent of the exchange interest had to be created, which would find broad acceptance. At first these were shells, later coins. The first token was created. The logistical disadvantages of a coin currency, the weight, soon became obvious and Europe became the first “Copycat” of China by introducing a paper currency. Since this introduction in the 15th century, there should be no payment innovations in the sense of Schumpeter’s creative destruction, except for the addition of plastic money.


Digital currency: Europe, a single cash country

It was not until 2019, with the launch of the digital Euro initiative, that the way in which payments are made in Europe was looked at more closely for the first time since the Monnet project was terminated in 2012. This observation was less a result of the European Central Bank’s own initiative or desire for innovation than a reaction to the introduction of a digital yuan in China. This project was gratefully adapted by America as an iterative innovator in the form of the digital dollar in 2020. Unfortunately, unlike China, Europe has not yet succeeded in getting over 90% of the population hooked up on a QR Code based payment wallet, which is as advanced as the Apple Store. This automatically raises the question of whether the blueprint of a currency reform forged in China can be applied to Europe. Especially in Germany, which uses the advantages of cash like no other in Europe, this question must be asked critically. Beyond the consumer perspective, the role of the banks as well as the retailer acceptance must also be evaluated. In order to be able to classify these developments, we have dealt with the topic of Central Bank Digital Currency (CBDC).


As mentioned at the beginning, Europe is by no means in the vanguard of discussion and strategic planning on the introduction of a digital currency. Similar to the European Payment Initiative (EPI), formerly the Pan European Payment Systems Initiative (PEPSI), one can speak from the outside rather of the embodiment of asnooze button user, who now jumps out of bed. This manifests itself in a newly formed working group, which is dealing with European implementation models consisting of the Chinese state digital currency in combination with the stable coin approach of the Libra Association. Stable Coin is defined as a block chain-based currency, which hedges monetary values by depositing Fiat money without exchange rate fluctuations. In this way, cash in its current form as a means of payment would be replaced by digital tokens, stored on a decentralized account management system and returned to the circulation of money in the form of a wallet.


To what extent are the potential users ready for a digital currency reform like CBDC?

The advantages communicated by the ECB lie not only in the constant supply of consumers and the improvement of hygiene in times of Corona, but also in the digitalisation of an aging financial instrument whose current form of existence is open to debate. It is questionable whether only the almost altruistic focus of the ECB on the end user carries weight in the decision to introduce  such a stable coin or whether other reasons are no less relevant.



Even if the above-mentioned advantages for the consumer make sense, the question remains whether they are sufficient to convince German and European cash lovers. Apart from the purely psychological component, which justifies the possession of cash as a means of payment for many, there is also that of data protection, since cash is anonymous. A devaluation of the social score or the ranking of an insurance company after buying a pizza is therefore not possible. Cash can also be used to deal with the failure of technical infrastructure. Although the digital euro is to meet the same data protection criteria as the physical version in the ECB’s marketing, this is, to put it mildly, unlikely from a point of view of the Money Laundering Act and the prevention of terrorism alone.


It is also worth mentioning in this context that cash in its current form cannot experience a negative interest rate. Even before the ECB’s massive bond package was passed and the associated speed of interest rate declined, consumers knew that their €10 notes would still be worth the same in the evening. Even if we are going too far here, the question of “who guarantees that the E-Euro will not become a financial product dependent on the financial markets and similar to a demand deposit?” must be allowed, right? From the consumer’s point of view, widespread acceptance is therefore questionable.



Nevertheless, the obvious advantages are communicated to merchants. In addition to the reduction in effort – on average seven steps are required from the acceptance of cash to crediting the account – cost savings are also emphasized, since processing cash as a payment is relatively more expensive for the merchant than the fee to be paid to the acquirer / network operator. But here too, disadvantages are obvious. In addition to possible additional costs of the acceptance to be set up at the terminal, the dependence on 100% availability and the resistance of the end customer to pay virtually for all items with the E-Euro, the last cash receipt that is smuggled past the cash security regulation would also be documented in future. So, if a merchant did not see the benefits already listed as a wake-up call to convert to “card only”, the question of why remains.


Why does the ECB now seem to be pulling out into the fast lane?

Even if the German cash affinity seems less relevant at the European level, the ECB’s sudden interest is not entirely conclusive at first glance, especially since other innovations such as Alipay as a digital ecosystem have provided little momentum in Europe apart from tax advantages for the user. One obvious point is the momentum created by other nations (China) and institutions (Libra Association), which increases the pressure on market participants to act. Even classic credit card brands like Visa and MasterCard are expanding their fields of activity in this direction. A possible reorganization of the fee model in a post-card scheme fee era is certainly a pleasant side effectin this context. Furthermore, an expected cost saving in money creation may be a possible driver. Since this is financed by taxes it would certainly gain in relevance with an euro that show no sign of abrasion , is not created or destroyed and is secure against fraud. As a side issue, the reduction of anonymity, which is “exclusively useful in the fight against terrorism”, is worth mentioning. In this context, the question inevitably arises as to whether consumers will in future hold an account with the ECB and thus make the current banking structure obsolete in terms of cash supply. Besides the expected chaos when opening an account and the confusion among end customers as to why an account at the ECB now exists, the lack of customer interaction could also have implications for the up-selling strategy of financial products in the retail banking sector. Finally, questions regarding the implementation of this strategy are also being discussed. What is the maximum amount of money that can be given away for daily use? Is there a danger of treating the currency as deposits, since they are only presented on the wallet in the form of fiat money? Is there an obligation to disclose suspicious cases that fall through the grid in the current situation?


Although the working group that has been set up has most probably examined all facets of the issue at hand, there are potential stumbling blocks before the pilot project launched in France can be replaced by a regular operation in the European currency area. Contrary to the “never change a running system” doctrine of many, it is to be hoped that these will be removed in order to sharpen the EU’s digital profile in banking and payment on an international level.