Digital euro for buying bread rolls? That could soon be possible. The European Central Bank is launching a test phase for a digital currency. It could also compete with cryptocurrencies such as bitcoin.

In a two-year test phase, the European Central Bank (ECB) wants to test whether the euro can also function as a currency in digital form.

However, the digital euro is not intended to replace banknotes and coins, but only to supplement them. However, it is still unclear whether a digital euro will actually be introduced. That will only be decided at the end of the test phase. There are still too many unanswered questions, not only about the actual implementation, but also about data protection.

Digital euro: This is the difference to online payments

Of course, it is already possible to pay digitally in euros, for example by credit card or via mobile payment services on a smartphone.

So what will change with a digital version of the euro? A digital euro would not simply be an electronic equivalent of a monetary value, such as a smartphone payment, but rather a digital currency, similar to a cryptocurrency.

In other words, it would give citizens access to central bank money. But what is central bank money?

Access to central bank money

To do this, we must first distinguish between money and currency. Money is a medium of exchange (in the form of coins and banknotes, for example) and has a fixed value. Currency, on the other hand, is merely the representation of value, which can also change due to exchange rate fluctuations, for example.

There are three forms of money in Europe:

  • Cash (ten percent of euro money)
  • Central bank money (ten percent of the euro money supply)
  • Giro money (80 percent of the euro money supply)

Central bank money is the money that the ECB issues. It can be cash or giro money. However, only banks, financial institutions or governments have access to it. As citizens, we only have access to it via cash. So the digital euro is supposed to change that.

ECB secures digital currency

A digital euro would allow us, for example, to deposit our money directly with the central bank, but also to pay with it.

Unlike cryptocurrencies such as Bitcoin, however, the currency would be under the supervision of the ECB and thus secured. The advantage would be that even if a bank goes bust, the digital investments would be secured.

Digital euro as competition to bitcoin?

The ECB also hopes to be able to offer citizens a secure, state-backed digital currency.

“We have to make sure that even in five to ten years, Europe’s monetary and financial sovereignty is not completely in the hands of non-European, private or state-owned providers of digital solutions,” an ECB spokesperson is quoted as saying by ARD.

But there are still many unanswered questions surrounding the digital euro.

Who, for example, should give citizens access to the digital currency? The banks, of course, hope that they, too, can continue to stand as intermediaries between the central bank and private individuals. Otherwise, they would become almost superfluous.

Concerns about data protection

There are also many technical questions. For example, should digital currency be secured via blockchain? The ECB is currently testing various approaches such as blockchain, but also a euro transaction system called TIPS, which stands for Target Instant Payment Settlement. A combination of both approaches would also be conceivable.

At the same time, it must be reconsidered whether and in what form offline payments should be possible.

For data protectionists, on the other hand, there is a completely different issue: privacy. One of the biggest advantages of cash payments is that they are anonymous.

No one can track who bought what, when and where. This anonymity should also be ensured with digital currency, at least in some form. Otherwise, there is a risk of total surveillance, warn data protectionists.