How I Would Explain the Digital Euro to My Grandmother
My approach to explain the central bank digital currency (CBDC) for the euro area to a person who has no previous knowledge.
Yes, it is simple!
You know this sentence for sure: How would you explain XY to your grandmother? You were asked this question in school and in university. The intention behind it is to be able to explain specific and complex topics in such a way that a person who is outside your subject area can understand it.
I am intensively involved with digital currencies that could be issued by a central bank. When I talk to my friends and family about the European Central Bank (ECB) plans to introduce such a digital currency — the so-called digital euro — for the euro area, they just look at me blankly. They have no idea of what I am talking about: Why do I need another currency? Is this a crypto currency? I already have digital money on my bank account…
For my grandmother digital currencies would be a total mystery. Sure, if you are not concerned with payments, banking, and monetary policy, how should you know about this project of the ECB? And when it comes to digital currencies, it can get very technical indeed.
How do you explain adequately a topic to a person who has no previous knowledge? With this article I would like to give an easy introduction to this topic, because when the central bank considers issuing a digital euro which can be used by the public, it will be of interest for everyone. Now, I am going to step into a first-person perspective here and try to give you a basic and easy understanding of what the digital euro is.
Ready? Here we go:
How to pay nowadays?
It is always a good starting point to explain the current situation to have a common basis. You can pay by…
- Cash. Especially in Germany, cash is the most used means of payment since it has nice features: paying by cash protects your privacy, it is easy, fast, and secure. Cash is issued by the central bank. You can access it via an ATM provided by your house bank or as cash back in the supermarket. BUT: The usage of cash is beginning to decline, and the corona pandemic contributed to that shift in payment habits. Our society is getting more and more digital.
- Cashless. Besides paying by cash you can also use cashless payment methods: you can pay by debit card (in Germany, this means mostly girocard) or credit card. The card is linked to a bank account. Your bank credits or debits amounts to your bank account, which is known as deposit money. For example, if you pay your shopping at a supermarket, the bank debits money from your account.
Equally, you can use modern payment methods, e.g., PayPal. But always keep in mind that whatever payment method you use, it is always linked to a bank account. Your bank in turn is secured since it has central bank reserves. Only retail banks have direct access to these central bank reserves while the public does not. To sum up:
- we have central bank reserves, which only banks have access to, and
- we have cash, which is money issued by the central bank.
- Finally, there are bank deposits provided by retail banks, which are available to you as a consumer.
Are they planning a new currency again?
Hearing the term digital euro for the first time, you might think it is a new currency… Well, you thought wrong. I can calm my grandma’s fears about introducing another currency: the central bank is not planning to issue a new currency but rather to offer the euro in a digital form. To be clear, when I talk about the digital euro, I mean the central bank digital currency (CBDC) which the ECB might introduce. The digital euro would not replace cash. According to the ECB, it would be an additional payment instrument which can be used by companies as well as consumers. Now, you might say: Isn’t the money I have on my bank account already digital? To some extent, yes, but remember: it is what your bank is credits or debits. Thus, if you have money on your account you have a liability towards your bank. A digital euro, however, would be a liability towards the central bank, just like physical cash. This is something new.
A next generation Bitcoin, or not? Okay, my grandmother would not even know what Bitcoin is. But in articles or news tickers, I have read rather often that the digital euro is called a cryptocurrency issued by central banks. I see myself forced to make this clear: please, DO NOT confuse the digital euro with cryptocurrencies such as Bitcoin. Bitcoin is a digital currency that is based on cryptographic technologies and issued by the private sector. The system around Bitcoin is decentralised. The digital euro would be a digital currency issued by a central bank.
Why does the ECB engage in digital currencies? The booming phase of the cryptocurrency Bitcoin indeed marked an important change: the interest in digital currencies virtually exploded. Private institutions and companies are also examining the possibilities around digital currencies. For example, the Diem Association which is initiated by Facebook announced to issue an own currency with will be pegged with different fiat currencies like for example the US Dollar. Since Diem may pose a risk on the stability of the financial system, central banks worldwide intensified their intentions to create a feasible alternative: a digital currency issued by a central bank. According to a survey of the Bank of International Settlements (BIS), more than 84% of central banks worldwide are thinking about issuing a digital currency. The design of a CBDC can vary among countries.
Here are some examples:
- China already started analysing the issuance of a digital version of the yuan in 2014 which will be available to the public. Whereas cryptocurrencies such as Bitcoin are decentralised the digital yuan will not.
- In the Bahamas, the usage of a digital currency — the sand dollar — has already become reality since October 2020. The sand dollar is connected to the Bahamian dollar which in turn is linked to the US dollar.
The ECB is still at an early stage of the project and will decide whether to introduce a digital version of the euro in the middle of this year. I think that we will soon see a cashless society (and the corona crisis is making a significant contribution). Why does the ECB want to issue a digital currency?
- A digital euro could be an important milestone to promote efficiency and innovation in payments. Payment processing will be faster and cheaper.
- Cash is declining. The ECB states that it would like to be prepared if the public develops a great need for digital currencies as a means of payment.
- Availability and usability of central bank money could be improved. With the digital euro a digital form of central bank money would be available to the public.
Conclusion
Will there be a change? I would say that there will no great changes in our payment behaviour. We are already using digital payments and the digital euro will be designed in a way that will likely allow you to use an app on your smartphone to make payments. This app could be provided by your bank, by a service provider or by the central bank directly.
Imagine you can use a digital euro app to pay without any contact. Take the selling process at a flea market as an example: Normally, vendors at the flea market are persons like me and you who would like to sell things that they no longer need. The only payment option is cash. Of course, due to the corona crisis a contactless way would be preferred: the digital euro could be the solution.
It is exciting what is currently happening around digital currencies. I hope that I was able to provide you a basic understanding of the digital euro and maybe spark your interest with my enthusiasm.
Thanks for reading!
