China does it, Sweden does it, and many other countries want to do it: to issue digitised central bank money for everyone. The European Central Bank (ECB) is currently working on such a scheme. It wants to launch “digital euro central bank money” as soon as possible. Many advocates praise the project as an “innovation,”, an important and step in an increasingly digitized world.
The ECB is declaring that a digital euro will be accessible for everyone, robust, secure, However, it should be clear that the path to becoming a surveillance state regime will accelerate considerably if, or more likely when a digital euro is issued. More of that in part 2.
A digital euro is not “better money” than the euro in circulation today. The planned digital euro is still fiat money, (from the Latin “It is so”- which is why if a government needs more money they just print it, and call it Quantitative Easing as in 2008) just as much as euro cash and euro bank balances represent fiat money: they are all created “out of nothing” by the ECB, which has the monopoly of euro production.
Just as is the case with the existing euro, the quantity of digital euros can be increased at any time, see quantitative easing above, it is backed by nothing, and a digital euro carries a 100% risk of devaluation should the ‘government’ need arise
The digital euro can either be “account based”—you keep it in an account held with the ECB—or it can be “token based”—money users receive a “token” that can be transferred from smartphone to smartphone via an app. Hoping for “anonymity” in payment transactions would be futile in both cases, which was the main attraction of digital crypto.
A look at China probably shows where the journey is headed: the Chinese digital central bank money is supposed to have a “controlled anonymity.” In other words, “only” the People’s Bank of China—that is, the Chinese Communist Party—should have access to the payment transaction data.
The ECB says the digital euro is a “complement” to cash and bank balances. But that’s not convincing. Because those who pay in cash obviously find it convenient and want to ensure their anonymity. Otherwise, they would pay electronically, i.e., transfer balances through PayPal, Apple Pay, or debit or credit cards.
It should be noted that people don’t just hold cash for spending purposes. They also demand it to protect themselves against bank failures, for example, or they also hold cash to be liquid even in the event of power outages, to be independent of online banking.
The suspicion that the ECB, along with other central banks, is more interested in taking cash out of circulation is a valid concern. If only electronic payments are possible, what little remains of “financial privacy” will be gone. The individual becomes completely transparent, that suits the state and its beneficiaries.
As soon as cash has been pushed back or stripped away entirely, monetary policymakers can implement an uninhibited negative interest rate policy to devalue debt. Customers can no longer get out of the “bank balance sheet”; the final escape door is then locked.
It is unlikely that a digital euro will prevail naturally against cash. Rather, the central banks will have to make the use of cash unattractive: by raising the costs of cash by increasing fees at ATMs or through upper limits for cash payments, or through social stigmatisation of cash (watch for keywords: money laundering, terrorist financing, etc.).
The digital euro does not compete with crypto units such as bitcoin. After all, a digital euro is fiat money issued by the state, which is exactly what all those who are looking for better money do not want to hold.
Rather, the target group for the digital money includes those who are basically content with the central currency as it currently is and those who are worried about a potential banking crash. This group probably represents a fairly large number of people who come into question as a potential target clientele for the digital state money.
The plan is to allow for a 1:1 exchange of euro cash and commercial bank balances with digital euros. Economically speaking, this means that the ECB insures the liabilities of the banks: the ECB transfers its creditworthiness, to commercial banks.
With a 1:1 exchange option nobody has to worry about losing their money balances held at commercial banks, as the ECB has the monopoly of euro production. The ECB cannot go bankrupt; it can create euros at any time to settle its payment obligations, regardless of the amount.
That said, no one needs to worry that their balances held at a commercial bank could be lost if the bank goes bankrupt and the deposit protection fund fails.
If a digital cash is publicly accepted, the scenario of commercial banks collapsing becomes unlikely; the digital money and credit system would be supported more than ever by the omnipotence of the ECB or whichever central bank has issued the digital currency.
In their Communist Manifesto (1848) Karl Marx and Friedrich Engels named ten “measures” which would lead to communism. The fifth measure reads as follows: “Centralisation of credit in the hands of the state by a national bank with state capital and exclusive monopoly.” The issue of a digital currency, euro or otherwise and the resulting consequences are undoubtedly another crucial step in bringing this vision to fruition.
In part 2, I will be looking at the implications of a UK digital currency
Main image Gert Altmann