The European Union (EU) wants to have its own virtual currency. This is the digital euro, another form of electronic money that will work just like cash, as if it were coins or bills. The European Central Bank (ECB) is the issuer of this virtual means of payment, which was created for the purpose of supplementing cash, not replacing it. Nor will it replace bank money.

The digital euros are housed in a virtual wallet that allows the same transactions to be performed as with coins and banknotes. It is not yet in circulation, but it is a pilot project. Over the next two years, issues like design and distribution will be addressed before the commissioning period, which will last until 2026, begins.

The benefits of the digital euro

Juan Carlos Higueras, economic analyst and professor at the EAE Business School, emphasizes the improvement in security this currency can offer: “It has less risk than fiat money, because you can track digitally and it is more secure. It simplifies digital payments”. In addition, the professor clarifies: “We are not talking about creating a new currency or bank money.”

From the point of view of combating money laundering and tax fraud, the digital euro brings certain advantages. “The sunken economy will be reduced,” Higueras predicts.

As a final incentive, it emphasizes the speed of converting from one currency to another. “For example, we can switch from euros to dollars with lower transaction costs and faster,” adds the professor.

With the digital euro, European citizens should not have to rely on digital media published and managed from outside the EU. As stated Joseph habitually General Director of the Institute of Financial Studies (IEF) of Barcelona in the Banco Sabadell Podcast “In the medium term, the digital euro, like other processes related to the digitization of the financial sector, will contribute to the improve productivity in all areas.”

But using this new technology also carries certain risks. Citizens will need digital wallets, which are more likely to receive attacks from computer scientists on a larger scale than physical ones. “There will be fear of any kind of cyber attack and the citizen will lose their savings. In some cases, it has already happened to cryptocurrencies,” notes Higueras. Therefore, the EU has decided to implement it with the necessary time and analysis to ensure safety.

Similar antecedents in other countries

Europe is not alone in launching a form of digital payment. “80% of central banks that issue legal tender are studying similar projects,” said Carlos Ruiz, Director of Studies at the Institute of Economic Studies (IEE). reference to a report by the Bank for International Settlements (BIS) in Basel, conducted in 65 countries.

The motivations that explain this collective interest differ per context. “Emerging countries’ central banks want to improve financial inclusion,” said Ruiz. “Large segments of the population in some of these countries do not have access to a bank account or basic financial knowledge, but cell phone use, on the other hand, is very widespread.”

The incentives in developed countries are different and go through the security and speed of payment guaranteed by digital currencies.

The country that has made the most progress in implementing virtual currencies is China. The digital yuan can be converted to cash yuan at 3,000 ATMs in Beijing. The goal is to extend this service to more banks (allowing only two) and to more places.

It is not a cryptocurrency

The digital euro is not like bitcoin or other cryptocurrencies. These are issued in a decentralized manner by private entities and their value is much less stable because they are not regulated by an entity like the ECB. “In the end, it’s more value deposits than currency,” explains the IEE’s study director. They have variations of up to 15% in their value. With this volatility, it is very difficult for a retailer to accept them as a means of payment. Instead, the digital currency will be linked to the value of the euro, so this problem will not arise,” he adds.

From a technology standpoint, for the time being, it will not choose to replicate the typical structure of cryptocurrencies, i.e. the chain of blocks known as blockchain.

There are four or five years ahead of what these virtual currencies will look like. Perhaps many people, who are already used to electronic payment, do not notice much difference in your daily life. But the implications for security, speed and standardization of these transactions will improve the citizen’s relationship with money.

Go out without cash

The situation resulting from the pandemic has changed the way trades are conducted. The use of physical money has been greatly reduced. The growth in payments by mobile phone or card was 45% in the European Union (EU) between March and December 2020, according to a study published late last year by the German market research firm Growth from Knowledge (GfK). The study predicts an increase of between 11% and 12% in smartphone payments.

The fact that many citizens pay with their mobile phones and take to the streets without cash does not mean that coins and notes will disappear. Joseph Soler, director of the Institute of Financial Studies (IEF) of Barcelona, ​​​​is convinced that physical money will decline in the coming years, but does not believe that its possible disappearance is socially acceptable. “Ultimately, it will always have the backing of a central bank, as a promise of payment,” concludes this expert in the Banco Sabadell Podcast.

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