The digital euro
Like the Chinese Central Bank, the ECB is also looking at a digital currency as an alternative means of payment. In mid-2021 the decision will be made and the ECB will decide whether the digital euro should be introduced. The main difference between a digital currency issued by the central bank and a cryptocurrency is determined by the government’s monopoly of power. A cryptocurrency is validated on a decentralised basis, which means that its value is equal to what the madman gives for it. A digital currency must always pass through the central bank, which has the task of monitoring price stability and can therefore also determine its value. The central bank is part of the government that can ban other (crypto) coins but can also force people to pay taxes in their own digital currency. There are so many advantages to a digital euro that, taken together, it can be seen as a major drawback.
The advantages of a digital euro
The costs of current payment transactions are high. In a digital environment, commercial banks are no longer required, because that is the main reason why people still have an account with a commercial bank. Every private individual and every business has an account with the central bank. Money laundering is impossible, and so a digital currency is an effective tool in the fight against crime, theft, corruption, illegal drugs, gambling, human trafficking, terrorism, and extortion. At present, commercial banks still have to invest a great deal to monitor all transactions in the economy and risk large fines if they do not meet the strictest requirements. Soon the central bank, together with the tax authorities, will validate every transaction. Illegal immigration will fall sharply because, without official papers, undocumented migrants will have no income. Undeclared work will be a thing of the past for good. Tax evasion has become impossible, which not only saves a great deal of money in detecting tax evasion but also brings in a great deal more tax money, as a result of which tax rates can be substantially reduced.
Digital money is also good for the economy. It is now possible, in the event of negative interest rates, to take the money from the bank and put it in an old sock. In the case of a digital euro, this is impossible, which means that the interest rate can become even more negative in order to achieve the objective. The alternative is to give digital money a limited shelf life, forcing people to convert the money into consumption before a certain date. Owners of the digital euro will no longer be afraid of their bank collapsing, end of the deposit guarantee scheme. On top of that, given the billions that were needed to get the financial system back on track after the Great Financial Crisis, there will be even greater savings.
The disadvantages of a digital euro
The advantages are great but so far-reaching that it has become a disadvantage. There is no longer any anonymity surrounding payments. Everything is traceable. By means of payment transactions, the government gains a great deal of insight into things that people still see as private.
Nowadays, commercial banks can do that too, but there is almost always the possibility of paying in cash. The introduction of the digital euro will therefore have to be linked to sound agreements on the protection of privacy. Furthermore, an even more negative interest rate is not good for people’s savings behaviour. Moreover, people spend digital money more easily than cash, but with a negative interest rate, they will be penalised even more heavily for their savings behaviour. If people stop saving at a commercial bank, that bank will have to come up with another way to get money, probably in the form of a higher interest rate. Finally, if there is a risk of a cyberattack, all-digital money could disappear. However, in practice, these are rather sought-after objections. After all, a large proportion of payment transactions already go digital. Only the grey and black circuit will be unhappy with the digital euro.
For investors, the introduction of digital coins means a further reduction in costs. These lower costs increase economic growth and also reduce direct investment costs. Buying and selling securities will become simpler and everything can be done a lot faster. In addition, the potential investible assets will increase with the disappearance of the grey and black circuit.
There will be more competition between commercial banks that want to attract assets at an attractive interest rate. Now that digital payments have rapidly become the norm as a result of the Corona crisis, the digital euro is also approaching. It can then contribute to a super-V-shaped recovery.