The digital euro offers more privacy than card payments and more security in a crisis

Rainer Olt, Head of the Eesti Pank Payment and Settlement Systems Department

The European Central Bank is continuing its preparations to complement the euro in cash by bringing a digital form of it into circulation as well. This change would be in line with changes in payment behaviour, as 70% of people in Estonia already use cards or smart devices when making purchases in shops (Survey of the Estonian Traders Association, 2023). The digital euro would give people confidence when making digital payments throughout the euro area that they do not need to worry about whether a shop will accept the debit or credit cards they have in their wallet or whether there will be limits on the minimum amount a card can be accepted for, or about what additional e-commerce wallet they will need when buying something online. In the same way that euro cash issued by the central bank can be used identically for paying in Finland, Cyprus or Mallorca and in all the 20 countries of the euro area, it will be possible to pay everywhere using just a single digital euro wallet.

One of the great benefits of the digital euro is that it protects the privacy of users. That may sound surprising, because we sometimes hear stories in public discussions that the digital central bank money, or “digital state money”, will allow the state to get even greater control and surveillance over its people. This is not the case though, because from the very beginning the principle of privacy has been central in the design of the digital euro, and it is planned to make it more private than the current infrastructure for instant and card payments allows. Privacy was the main priority that people mentioned when the European Central Bank asked the general public more broadly about the digital euro, and so we have taken that as our starting point. The survey carried out by the ECB in 2021 showed that the other priority alongside the protection of privacy was protection against criminal activities like fraud, money laundering and terrorist financing. The search is on for solutions that would allow the banks to identify suspicious transactions without the central bank as the digital euro system operator being able to see any personal data.

The requirements for privacy and data protection were clearly stated in the draft legislation proposed by the European Commission in summer 2023 that is paving the way for the introduction of the digital euro into circulation and that is currently going through the legislative process. The infrastructure for the digital euro is going to be developed  in accordance with those requirements so that the central bank as issuer of digital euro and data processor cannot monitor who is paying who and for what. In the same way, the central bank cannot know who is using cash and for what. The system operators for interbank instant payments and card payments can currently see and use the information on who is paying for what, but this would not be the case in the digital euro system, as that information would only be visible to the bank of the person paying and the person receiving the payment. The European Union rules on data protection, privacy protection and countering  money laundering and financing of terrorism  would be followed, as they are now with any form of electronic payment.

The innovation with the digital euro would be that payments can be made in a physical proximity  without an internet connection, as the digital euro moves from one smart device to another and can then be used further. The digital euro will be very similar to cash in terms of privacy, as the only people aware of the transaction would be the person paying and the person receiving the payment. Offline use like this not only ensures privacy, but also makes certain that payments can be made even when other private sector electronic means of payment are interrupted, or if there is a major electricity or data connectivity outage or other emergency. In this way the digital euro would provide an alternative rail for making electronic payments, and so would make the circulation of digital money in Estonia more resistant to any crisis. This would work for digital transfers between people, and payments in shops and online, and it would allow the state to transfer money to people in an emergency for pensions and child benefits for example. This means there would be a public solution to ensure that the electronic circulation of digital money can continue even if private sector solutions like the widely used card payment systems are interrupted or under attack, or if the internet connection is lost. Any interruption to the system at the moment means that people often have to abandon their purchases or go and look for an ATM because they do not have any cash in their pocket or any alternative digital means of making payments.

Estonia and the rest of Europe are heavily dependent on the US companies MasterCard and Visa for card payments, but it is important for people to be equally able to access various alternative means of payment, including some that are not dependent on companies from across the ocean. This means that alongside card payments and instant online bank transfers there should in future be a digital euro, as well as cash of course, and Eesti Pank advises that it is always best for people to have enough cash to hand to cover at least one purchase in a shop or at home to cover the essentials for a family for a week. Preparations for the digital euro are continuing in parallel to the legislative process for it, alongside which separate legislation is strengthening the position of cash in the euro area at the same time. This means that the digital euro will not replace cash, and that cash will continue to have to be accepted as a means of payment alongside electronic solutions even though we increasingly prefer electronic payments. Eesti Pank believes that cash will play an important role in the future, as it increases the options for making payments in various types of emergency, when digital payments may be interrupted.

No decision has yet been made on introducing a digital euro. The European Central Bank will only consider it once the necessary legislation has been passed at the EU level and by the Member States. The European Central Bank recently released its latest interim report on the project, which gives more detailed information on the preparations for the digital euro and on the characteristics of it. This interim report discusses the topic of privacy more thoroughly.

WHAT IS THE DIGITAL EURO?

In simple terms the digital euro would be like cash that is issued into circulation by the central bank, which takes responsibility for the security and continuous availability of it. This would be a public service for the people without any additional fee for using it. One option for using the digital euro would be to have a digital euro wallet app on mobile devices that is connected to the current payment account, similarly  to the digital wallet apps of tech firms like Apple Pay and Google Pay. Another option for those who do not have a mobile device would be a digital euro payment card. Both services would be provided by the commercial bank where the user has their current payment account, and so neither Eesti Pank nor the European Central Bank would start to open digital euro wallets or accounts for people or companies. That role, together with the job of managing client relationships, would remain the responsibility of the commercial banks and of payment institutions.