A Digital Euro | Hacker News Reader

A Digital Euro

ecb.europa.eu

47 pointsperfunctory19 comments

Euros exist in physical form (notes and coins). There is a digital form of Euros already, called "reserves". However, only banks and other financial institutions are able to hold these reserves (they are allowed to have reserve accounts at the ECB).

What you have in your bank account is "credit" from the bank to you. You can currently ask to withdraw this credit in the form of physical Euros.

A "Digital Euro" would mean that regular people could hold digital Euros at an account they hold with the ECB, just like the large financial institutions do.

This could be useful to allow the ECB to fight price deflation, because:

1. The ECB can directly credit the accounts of hundreds of millions of Europeans (without having to go via banks). This would mean they could fine-tune policy by depositing small amounts every single day in every single account. This solves the "pushing-on-a-string" problem of the ECB making it cheap for banks to lend, but finding that the banks are still unwilling to lend or that people are unwilling to borrow. The ECB could also decide to only top-up the accounts of people with low balances, so that aid is targeted.

2. The ECB can more effectively increase money velocity by enforcing negative interest rates. You can currently avoid negative interest rates by simply withdrawing physical Euros from your bank. But if the ECB discontinues or restricts the availability of physical Euros, you will only be able to withdraw Digital Euros from your bank. If your Euros are digital, you cannot avoid a negative interest rate.

Although price deflation is great if you have money or are owed money, price deflation makes it difficult for people who owe money to repay their loans. This is because their labor is earning them less money each year compared to the debt they owe. This is why the ECB and other central banks are very concerned about price deflation.

Price deflation is only of concern to debtors with fixed rate loans. For those with variable rate loans the rate will tend to drop during deflationary periods.

I agree, if the lender makes cheaper credit available, and if borrowers are automatically provided with drops in their loan rates. If borrowers have to shop around for a better deal and pay fees in the process, this would dull the effect of a lower base rate.

Some other reasons that the ECB wishes to fight deflation are described here:

https://www.ecb.europa.eu/press/key/date/2016/html/sp160404....

From the 50 page report linked in the post, I have the impression that the constraints and features that they want eliminate most of the advantages of a digital euro.

The biggest advantage in my mind would be the elimination of counterparty risk, because the ECB can't go broke. But then they don't want to see bank runs where people convert all their commercial bank deposits into digital Euro, so they'll put a limit on the amount you can hold. So this can't really be used as a safer alternative for bank deposits at scale.

Another advantage I expected would be the elimination of the need for settlement for digital euro transactions. But then they talk about a system of intermediaries who manage the system and who would still have some form of settlement between them?

There would also be a system of onboarding much like for a regular bank account (not anonymous), restrictions on foreigners to limit use as an investment vehicle etc.

Can anyone with more of a background in central banking describe what this means in more concrete terms (or explain that this is fluff). The best I can find for what this means is in the PDF

"In this report, the term digital euro denotes a liability of the Eurosystem recorded in digital form as a complement to cash and central bank deposits. The analysis focuses on the design of a digital euro for use in retail transactions available to the general public – that is, including citizens and non-bank firms – rather than only being available to traditional participants (typically banks) in the large-value payment system managed by the central bank."

Is this not how the system already works? Presumably there is not a 1 <> 1 mapping of owned Euros to bank note/coins?

The report talks a lot about unbanked people, innovation in payments and so on, but I don't really see how those things relate.

This is how I understand it

Right now, if you, for convenience reasons, don't want to carry cash around but want to pay digitally you are basically forced to open a commercial bank deposit. That has some implications

- risk - bank can go out of business (though it's insured. But then again the cost of the insurance is baked into the system even though you might not see it directly)

- bank can invest your money on your behalf without you having any say in how it's invested (say in a coal plant in India)

With digital euro private individuals will gain ability to open accounts directly with the central bank which solves both problems. Central bank cannot go out of business (by definition), and they are not in the investment business. So digital euro would really be a digital version of the bank notes under the mattress.

It's a great idea imho, but requires central banks to more rapidly modernize (both from a technology and policy perspective). It banks the unbanked or underbanked, and it provides basic financial services to citizens as they should be treated: as a utility (no cost citizen deposit accounts, low cost instant payments, etc). This would also enable policy efforts the ECB wants to champion (srgseg has a great comment about this [1]). There are efforts on the US Fed front to push for this also [2].

[1] https://news.ycombinator.com/item?id=24688205

[2] https://news.ycombinator.com/item?id=24593343

There are only two types of euros: notes that are physical evidence of said money, and deposits in banks. You can transact by exchanging notes or by instructing your bank to perform a transfer. Both have limitations with the second being that you have to involve banks in the transaction and have a bank account, etc.

Digital currency has all the benefits of both methods with none of the drawbacks. No bank account required, no banks required (other than the ECB, but they are also required for bank notes), instant exchange, privacy, in person or distant transactions, etc.

With the prevalent, justified or not, concerns regarding tax evasion, corruption and money laundering in the EU, I very much doubt that the digital Euro will prioritize preserving privacy. I rather think of the digital Euro of an attempt to finally get rid of bank notes (large ones first) in order to curb aforementioned ills.

> There are only two types of euros: notes that are physical evidence of said money, and deposits in banks.

There are also "bank reserves", which is the money sitting in the accounts that banks have at the central bank. Bank reserves, unlike deposits in a commercial bank, are equivalent to notes and coins and can be thought of as the current form of the digital euro. Banks use it for settlement of transactions between them. So the idea is to make this "real" digital money directly available to individuals and companies, like physical cash.

Central banks are jelous of stable coins getting traction, and it seems that they want to create competition, which is a good thing. The problem seems that even they can't decide what they want and how they want to implement it.

Stable coins can be owned by any entity using a private key without KYC regulations (that don't fit the central banking system), but if KYC regulations are required (just like with opening a bank account), hundreds of millions of people (or even billions) are probably left behind again in the world.

I don't think they are 'jealous' of anything. The central banks have no incentive to create competition on money markets, their central issue is creating a stable currency that fluctuates little in value; creating another 'coin' would go against that cornerstone. I think you are trying to shoe horn in the idea of this being a crypto / blockchain backed thing, which (while it might be implemented on top of such) it is definitively not.

They are specifically mentioning stable coins as an inspiration/competition. When you have to say why your product is better than another, you are definitely taking it seriously.

Of course cryptocurrencies are not short term risk for central banks, but they already have some advantages that grow long term.

You didn't read the entire article, did you? They go on to say that they are specifically different than crypto, because they are backed by a central bank. That makes a world of a difference.

Sounds like a great idea. This is an "offline" digital payment method, essentially the digital equivalent of a bank note that can be exchanged with others without reference to a central repository.

Its implementation is left as an exercise for the reader...

What makes you think it's offline?

The original 50 page report linked in the post mentions the possibility of offline transactions. It is thought to be in conflict with another possible feature, remuneration (i.e. getting interest on your money), and they even consider a more complicated hybrid system to get both features.

The whole report is just an exploration of the desirable features and design options, nothing is final. Blockchain seems to be out though.

(edit: fixed spelling of remuneration)

I am not sure if there is offline implementation solution for the problem currently.

The perfect helicopter money.

Imagine distributing virtual currency through a wallet app and have these virtual bucks expire in a month or less if you want more velocity.

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