Euro Tag

2022 has been the year of the rise of cryptocurrencies, decentralized finance and the development of Blockchain systems. So much so, that governments and central institutions (such as the European Central Bank) have sought to recover their digital currency projects so that they can begin to form part of our daily lives. To invite you to be a true expert on the subject, we bring this post in which we explain what the euro-digital, what differentiates it from a cryptocurrency and its advantages and disadvantages. Here we go!

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What is the digital euro?

The digital euro is a perfect fusion between the convenience of digital pages and cryptocurrencies with the security of backing in the European Central Bank’s issuance and custody system.. It will be part of a natural evolution of payment systems that will make it possible to pay in situations where using cash is less practical.

One important point we need to hear is that the digital euro not intended to replace cash, but to complement it. It will be one more option to make payments.

In summary, the digital euro will allow European citizens to have a secure and centralized alternative to be able to use digital means of payment as a complement to the cash that is already used.

The digital euro is part of the category of CBDCs or digital currencies issued by a central bank. Let’s see what its features are.

What is a CDBC or Digital Currency issued by a central bank

a CBDC (Central Bank Digital Currency) it is the digitization of FIAT money or government money that we use on a day-to-day basis. The issuer of this digital currency is still a central bank and monetary policy will continue to follow the same macroeconomic variables as FIAT money.

This means that the CBDC is a digital representation of the tangible and traditional restaurant. Transactions will continue to be centralized by governments and it will be this government that ultimately controls the stock/money flow ratio (this dynamic determines inflation/currency devaluation).

Difference between digital euro or CDBC with cryptocurrencies

We should not confuse it with cryptocurrencies; that although their digital activities are also freely exchangeable between individuals and widely accessible (having an internet connection is almost the only requirement), andThese are not regulated by any central institution. Cryptocurrencies work on a decentralized network between individuals (P2P or Peer to Peer) and the governance or control also resides with the users.

In the following diagram we can see some of the different variables that represent the characteristics of the different forms of money. See that my (non-permissioned) cryptocurrencies are mine Digital, Universal and Peer-to-Peer ; central bank digital currencies in addition to the above characteristics are additionally issued by a central bank.

The state of the digital euro in 2022. Why did it accelerate?

The rise of blockchain technologies (in terms of scalability, decentralization and security) added to the increase in capitalizations of the cryptocurrency market has led to a parabolic user acquisition that is hard to look aside from.

This trend also continues on the institutional side. The governments of countries like El Salvador have adopted a Bitcoin as legal currency (they have even given each citizen an amount of it to start encouraging its use) more conservative countries like Ukraine have legalized the currency in the country.

In fact, the course of new users using cryptocurrencies reminds us (with surprise) of the course of Internet user acquisition that we saw at the beginning of the millennium.

These circumstances have created a perfect breeding ground for institutions such as the European Union see an opportunity to develop a digital version of the cash we use on a day-to-day basis to make it a more convenient option.

Advantages of the Digital Euro and other CDBCs

The digital nature of CDBCs brought a number of qualitative sales that a paper money-based system cannot replicate. Some of these advantages are:

• Traceability for authorities and security for citizens. Being a currency of a digital nature makes it a much safer exchange asset, since all operations of a fraudulent or illegal nature can be traced (something that was virtually impossible with physical money). In addition, since it is not money that you carry in a wallet, it makes robberies or bribes much more unlikely and prevents physical activities of counterfeiting bills.
• Reduction of entry barriers to banking. One of the challenges faced by banking systems in less developed economies is bankarization. One of the advantages of this digital system is that it considerably reduces the barriers of having an account or wallet to deposit your euros/cbdcdigits and be able to transact with them.
• Improvement of monetary policy to maintain greater monitoring. Central banks will have more context when making decisions about the currency’s monetary policy by having more information and data on its use. This is if the main difference with standard cryptocurrencies like Bitcoin is that monetary policy will depend on centralized institutions.