The ongoing digitalisation of the economy is leading to far-reaching changes in many areas of our lives. How we pay for the goods and services we want is no exception. Innovative forms of private digital money are emerging in response to changing needs, which are transforming how we pay and the payment landscape.
The global pandemic boosted the use of online payments, the emergence of new payment methods and a sharp decline in the use of cash.
European Central Bank (ECB) data confirms, for instance, that, between 2022 and 2024, the use of retail cash payments in Malta declined by 10 per cent, the second-highest decline in the EU. The IMF estimates that, globally, less than 20 per cent of the value of retail transactions were made with cash in 2021.
According to a Central Bank of Malta (CBM) survey, around half of the Maltese would be on board with the introduction of a digital version of the euro, though the vast majority are unaware of it. This is hardly surprising as the ECB has since 2021 been exploring the possibility of introducing a digital euro.
The Bank of International Settlements defines Central Bank Digital Currencies (CBDC) as a digital form of money that allows users to pay each other using a direct claim on the central bank. In other words, it aims to reinvent central bank money – cash and coins – in a digital form.
Some argue that such a CBDC, if issued, would be redundant given the vast supply of private digital monies available, including bank deposits, credit cards, electronic money and mobile applications and future payment solutions based on stablecoins ‒ cryptocurrencies whose value is pegged, or tied, to that of another currency, commodity or financial instrument.
Convertibility at par with bank notes provides confidence in private money because it reassures us of its ultimate value and payment usability.
ECB research confirms that, if given the choice, almost half of euro-area consumers would prefer to pay with cashless means of payment, such as cards. Internet sales in the euro area have doubled since 2015.
Of course, the introduction of a digital euro presents challenges. While people would find a digital euro attractive because of its unique property as the only riskless form of money, they would also need to use it easily wherever they can pay digitally.
Consumers will only use a digital euro if merchants accept it and merchants will want to be reassured that consumers want to use it. Developing a convincing value proposition for all stakeholders is therefore critical to the digital euro’s success.
Still, the advantages of a digital euro far outweigh any possible disadvantages. For consumers, the digital euro would offer a cost-free and convenient way to pay digitally anywhere in the euro area. It would also increase privacy in digital payments.
As a public and independent institution, the ECB has no interest in monetising users’ payment data and it could only process them to the extent necessary for the functions of the digital euro. The ECB will also be more trusted in complying with regulations on anti-money laundering and combatting the financing of terrorism.
Ultimately, central bank money in the form of bank notes or CBDCs provides the reference value for all other forms of money in the economy.
Now that more people are increasingly shifting towards digital payments, we must ensure that European citizens have a new, nearly risk-free digital payment system.
The digital euro is the future of money and a necessary monetary anchor for the digital era.