EuropeEurope Letter

The digital euro could well flop if a cap limits its usefulness

The prospect of private companies establishing themselves as tollbooths on transactions instead is concerning

The European Union is moving closer to introducing a digital euro. It’s an initiative that has two prominent Irish figures at its head: Paschal Donohoe is key to negotiations as president of the Eurogroup, while Mairéad McGuinness is overseeing the development of its legislation as commissioner for financial services.

But what is it for? At the moment, cash is the only way that citizens are able to directly hold money issued by a central bank.

Any other kind of euro, whether stored in a bank account or a payment app, is only as reliable as the intermediary providing it.

The idea of a digital euro is to create a way for citizens to directly hold central bank-issued money in the digital age.


There are radicals of various stripes in digital currency communities. Some anarchists and libertarians want private or community-run digital currencies to replace state money.

There’s also a pro-state group that views the banking sector as deeply flawed and a continual source of economic crises, and sees this is a golden opportunity to remove its role as an intermediary between citizens and their money.

According to this thinking, retail and investment banking should be separated. Those who want high rates of return on their money can continue to take risks in lending it to banks for investment purposes. But people who merely want to keep their money somewhere safe, without risk, could keep it directly with the central bank.

No such radical thoughts trouble the minds of the policymakers creating the digital euro, however: they want to preserve the status quo, not challenge it.

The initial motivation for creating a digital euro was fear that the private sector might challenge the role of the state in creating currency, spurred by an announcement a few years ago that Facebook was planning a currency called libra.

Facebook’s huge user base meant a significant proportion of economic transactions could shift into this new private currency, diluting the power of central banks to influence the economy through monetary policy.

Libra never came about in the end, but it spurred the creation of official digital money as an attempt to preserve the role of the state and of central banks.

A digital euro – as secure a form of money as cash, but without the storage problems – would raise the question of why anyone would keep their savings in an account where anything over €100,000 would be lost if the bank were to make poor decisions and go bust. Such an attractive offer could cause bank runs by accident.

But those creating the digital euro don’t actually want to take over retail banking – they think the private sector is best placed to do that. So there is talk of limiting the amount each citizen can hold in digital euro to €3,000.

A limit like this, however, runs the risk that the digital euro would be a flop that no one uses. This would be unfortunate, because as the use of cash dwindles, the prospect of private companies establishing themselves as tollbooths on transactions is genuinely concerning.

We know what this leads to, because credit card companies and ecommerce payment providers already abuse their positions to levy extortionate fees.

For legacy reasons, payment services in Europe were largely developed in the United States and therefore have limits and anachronisms related to the fact that they were designed around the peculiarities of the rather antiquated American banking system.

They are ubiquitous but unaccountable: try getting an online payment provider to address why you can’t withdraw your funds (a year-long battle, in my personal experience).

The greatest concern among the public about a central bank digital euro is about privacy, because of entirely valid fears about whether a state body would have access to records of personal financial transactions.

It’s less recognised, however, that all the private digital payment services we use carry this same privacy risk, with the added problem that they have a duty to shareholders to exploit this personal data for their maximum financial gain, without the accountability of public institutions.

The flourishing of cryptocurrencies in recent years means that there are many examples of ways in which digital currencies can be built to protect the privacy of transactions, all available to learn from.

There’s tough competition in the provision of digital banking and payment services. But states and central banks have a unique advantage in offering security. If they squander it, others will fill the gap.