What is the digital Euro? The digital Euro is a proposed central bank digital currency (CBDC) that would be issued by the European Central Bank (ECB). It is intended to complement, not replace, cash and coins. The digital Euro would be available to all citizens and businesses in the European Union (EU). What are the benefits of a digital Euro? A digital Euro would offer many benefits. For citizens, it would provide an easy and convenient way to make payments. For businesses, it would reduce costs associated with processing payments. For the ECB, it would create a more efficient and resilient monetary system. What are the risks of a digital Euro? Like any new technology, there are risks associated with a digital Euro. These include cybersecurity risks, as well as risks to financial stability if private sector banks were to adopt similar technologies. However, these risks can be mitigated through careful design and implementation of the digital Euro. What is the status of the digital Euro? The ECB is currently exploring the possibility of issuing a digital Euro. A number of pilot projects are underway to test different aspects of CBDCs. No decisions have been made yet on whether or not to issue a digital Euro.

Is a Silent Revolution in Commercial Banking on the Way through the Digital Euro?

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On the second of October 2020, the European Central Bank (ECB) issued a press release that was not picked up by major news outlets, where it stated its intention to intensify its work on a digital euro.

The ECB listed three scenarios under which it might want to go ahead with the issuance of a digital euro, namely:

(i)      “a significant decline in the use of cash” (we don’t see this happening anytime soon unless transactions costs are significantly slashed, especially insofar as low-value transactions are concerned and minimum charges apply);

(ii)          “the launch of global private means of payment that might raise regulatory concerns and pose risks for financial stability and consumer protection” (a specific reference to Libra that stops just shy of naming it); and

(iii)       a broad take-up of Central Bank Digital Currencies (CBDC) “issued by foreign central banks” (a specific reference to a digital Yuan Renminbi with which the Chinese Government is wisely planning to sideline the USD as the world currency).

The roadmap proposed by the ECB is reproduced hereunder.

Digital Euro Roadmap

So far, only commercial banks have access to CDBC. They have account balances at the central bank through which they clear payment transactions among themselves. The main innovation of digital central bank money available to everyone would be that everyone would have direct or indirect access to such central bank money, and could use it for digital payment transactions.

In practice, there are two ways to achieve this:

1. Everyone subscribing to CDBC (in this case the digital euro) gets an account at the central bank for payment transactions. The balances on this account are exchangeable on a one-to-one basis with balances at commercial banks or cash. Like cash, these balances should, in theory, not be at risk of insolvency because the central bank is behind them and the central bank can print money at will (including for “monetising” sovereign debt); and

2. CDBC subscribers would have special accounts at commercial banks for digital central bank money. In contradistinction to normal commercial bank deposits, balances on these accounts would not be a loan to the bank (a liability on the commercial banks’ balance sheets), but an escrow account or a nominee account of sorts. The account holder would be the owner of the money directly, with the bank serving only as a service or tool provider. If these accounts exist, the CDBC can be transferred from commercial banks’ central bank account to a private CBDC account at a commercial bank.

What is sure, however, given the unison with which the European Commission and central bankers have acted to restrict the possibilities of anonymous transactions even on trivial amounts, is that a “global private means of payment”, if issued in a jurisdiction that does not entail hefty AML procedures that unnecessarily increase transactions costs while being mostly ineffective at stemming the practice of sophisticated money laundering, would be preferable to one that gets subscribers entangled in a web of unnecessary and sometimes even ridiculous AML procedures (most of the time flying in the face of GDPR, over which AML takes precedence). If this cannot be provided by a “global private means of payment”, it certainly can be provided by the Chinese government, which might strategically forego privacy on foreign holders of its digital currency for some initial time until it establishes itself as the new de facto world reserve currency. It will therefore end up being a race to the bottom. One can try to block network access to a digital currency, but VPNs can circumvent such measures without much effort.

The question, therefore, is what implications the work on the Digital Euro will have on the commercial banking sector in general and AML enforceability in particular.

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