Economy & Markets

2020-11-08 Donato Masciandaro

Will There Be a Digital Euro? Yes, and It Will Be Double

The European Central Bank has begun to talk explicitly about a digital euro, with a clear message: it will be come to life when it is a currency that, joining existing currencies, contributes to solving problems, and certainly not to creating them. And the option is already potentially operational: a double digital euro, that is, one version for "retail" and one for "wholesale." The idea is very interesting, in particular if we take into account the alternative hypothesis – also presented recently – of a global digital currency.

Starting in mid-October, the media began to give prominent attention to the first report by the European Central Bank (ECB) dedicated to the possibility of issuing a digital currency, signed by Christine Lagarde and Fabio Panetta, respectively the president of the ECB and a member of the Executive Board. The report presents the various problems that must be faced to define and implement a step that would represent a radical evolution of currency. The approach used by the ECB is to innovate while minimizing risk, a common approach by central bankers. Put differently, the digital euro should solve problems, not create them. The aversion to risk is particularly understandable on this subject: before creating a new currency, it is necessary to examine its economic properties and the technical and legal characteristics necessary to achieve them. Otherwise, the risk of opening a sort of Pandora's box becomes extremely high. Let us look at these characteristics in detail.

We will start from a general premise: a currency has at least three properties, and each of them responds to the need to give individuals a tool to deal with different forms of risk in the best manner possible.

The first risk is that of becoming illiquid. We explain: each of us desires to make purchases of goods and services when we want to; but to fulfill our desires it is necessary to have something that others accept in exchange for what we want to purchase, otherwise we are illiquid. This something is called currency. So a currency is effective when it is a tool for addressing the risk of illiquidity. That effectiveness will evidently be greater the more the currency is accepted for exchanges. In daily activity, we take the acceptability of a currency for granted. However, it is sufficient to think of what happens when we're abroad and we need to make a payment, but we lack the only currency accepted, for example the local currency in cash; illiquidity is a very unpleasant situation. Some properties of currency make acceptability greater. For example, a currency is more accepted to the extent that it is a unit of account to calculate prices, and is defined by law as a payment instrument. A potential digital euro would have both of these characteristics.

At the same time though, a currency is accepted to the extent that its value is guaranteed; a currency more effectively performs its function the lower the risk that its value will fall. The second risk is thus that of devaluation. Currency is a reserve of value. The more a currency maintains its value over time, the better it performs its function as a payment instrument. The risk of devaluation in turn depends on two factors: the stability of the currency's value, with respect to that of other goods and services, and the presence or absence of a return. A digital euro would benefit from the same value as the paper euro we know today, that is protected by the fact that the ECB's primary goal is monetary stability; a goal that – we should not forget – our currency has performed handsomely. With regard to the potential return of a digital euro, this would open one of the most delicate aspects to resolve, due to its implications for both the efficacy of monetary policy, and the stability of the banking system.

A key point must be recalled here: assuming a return on a currency issued by the State is not an original policy per se. Today the liabilities of central banks that function as currency can already provide remuneration if held by banks as reserves with the central bank itself. This is a privilege which is not granted to citizens who hold banknotes. The justification is that the existence of remuneration for bank reserves can increase the efficacy of monetary policy to influence macroeconomic conditions. Moreover, for reasons of completeness, it should be recalled that in recent years that characteristic has been transformed from a privilege into a tax; various central banks – including our ECB – currently set negative rates on bank reserves to reduce the risk that, in a period characterized by high and lasting uncertainty, banks decide to "park" their liquidity with others, instead of issuing credit to businesses and families.

How should we conceive of remuneration on a hypothetical digital euro? An article on this subject published last October by Bindsell and Panetta at suggested an original solution.[1] To summarize, the proposal is based on two pillars. First, it is necessary to allow a greater number of users to use the digital euro for exchanges: the more the users, the more the risk of illiquidity is reduced, and the more the efficacy of the digital euro will increase, with benefits for everyone. Second, it is also necessary to avoid the possibility that the indiscriminate use of the digital euro as a reserve of value can produce undesired macroeconomic effects. So it would be necessary to segment the users, creating two different digital euros: a "retail euro" and a "wholesale euro." The retail digital euro would be usable by the residents of the euro area, with a maximum amount possible to hold, and a non-negative return. The wholesale digital euro, on the other hand, would be characterized by an inverse relationship between the amount held and the return paid; the latter rate could go into negative territory. In addition, the returns of the two digital euros should be defined simultaneously and consistent with the overall structure of market rates, precisely to avoid undesired effects with respect to the goals of monetary and financial stability. Bindsell and Panetta also offer a concrete example, with simple calculations, precisely to provide an example: today the maximum amount per capita for the digital euro could be equal to 3,000 euros, with a return of zero, while the return on the wholesale euro should be negative 100 base points.

Lastly, the design of the digital euro must consider the fact that a third property of currency exists, that is both ancient and modern: being a reserve of information. To explain better: when we spend a currency, we provide information on ourselves. The dissemination of private information will depend on the type of currency we use. The third risk that characterizes a currency is so-called privacy risk. Evidently this can go theoretically from zero – if we use banknotes, provided they are not recognizable in some way – and rise depending on the payments systems used.

If we look carefully, the property of a currency as a reserve of information is an age-old property, because it has always been a characteristic appreciated by some operators. But by whom? We can define two different preferences for privacy, that can be considered normal and pathological. Privacy can be appreciated for normal reasons, since each individual can legitimately want information regarding them not to be disseminated. But privacy can also be appreciated for pathological reasons, for example by those who commit a financial crime – from tax evasion upwards – and do not want to be discovered. In other words, the maximum level of privacy – anonymity – is a characteristic that can make a currency an effective tool to recycle the proceeds of unlawful activities, to be able to use them for economic choices – consumption or investment – without that use increasing the likelihood that the upstream crime is discovered.

At the same time, a currency as a reserve of information is a very modern property because the spread of electronic payment tools, and their possible interaction with social networks, has made and will increasingly make the defense of individual privacy a central issue. On this specific problem as well, the definition of the digital euro will have to consider the characteristics of other payment instruments – starting with banknotes – taking into account the institutional and technical peculiarities that define the production and distribution of currencies. An example is the role that can be played by the nature of the issuer of the digital currency. To this point we have referred to public currency, but there can also be private issuers: think of banks and the attempt underway by Facebook to issue its own currency, named Libra. The birth of the digital euro thus raises a wide range of questions. But the responses are beginning to emerge, including original and coherent responses such as that of the double euro. What's important is not to stop now.

There are in fact various alternative proposals regarding digital public currencies. During the summer of last year, the governor of the Bank of England also launched the idea of a currency that was at the same time public, electronic, and supranational. The proposal originates from an undoubtedly interesting perspective. In principle, an orderly development of global exchanges, both real and financial, would have everything to gain from the presence of a currency that is at the same time public, electronic, and managed as a global public good. If we look carefully, it is the simple transposition at the planetary level of the reasons that have led all countries, especially democratic countries with market economies – although with difficulty and after a long process – to remove national currencies from the control of politicians and entrust them to independent central banks.

What are the pillars on which a global currency would rest? Economic history and science tell us that a currency becomes global when it guarantees at least two of the three properties cited above. On the one hand, a global currency must minimize the risks of illiquidity; on the other hand, it must minimize the risks of depreciation. Thus the history of global currencies is a history of cycles, where the state that produced the sought-after currency was a different one over the course of centuries: Venice, Genoa, Amsterdam, Spain, the United Kingdom, and the United States, to provide evocative examples from different eras in the history of our Western hemisphere.

Yet economic history and science also speak of another regular occurrence: the states that produce the reserve currency derive economic and political benefits in performing that function. Certainly, issuing a global currency is not a free lunch: for example, the fact that dollar is used as the global currency in real and financial exchanges – that is, that there is a global demand for dollars – could condition U.S. monetary policy. This is true at least in principle: in reality – again taking the example of the dollar – the sensitivity of the United States central bank (the Federal Reserve System-Fed) to the international context has to date always been functional to domestic interests. For example, in the recent period, the Fed gave greater consideration to the international situation when it had to strengthen the choice to loosen monetary policy, a decision already made for strictly domestic reasons.

We shall now return to the proposal for a global digital currency: why should a sovereign country – or better, national politicians – ever voluntarily give up the benefits of producing its own currency, to delegate the management to an independent global central bank? The birth of independent central banks – including the ECB – was possible only when national politicians saw an immediate benefit from delegating monetary policy. To have a global public currency there needs to be active and systematic collaboration among all countries, including the United States and China. Is it possible for someone to cut off the branch of a tree they are sitting on? At the least, it's unlikely.

The unlikely political possibility of creating a global super-currency must not, however, crush the debate on another aspect of the proposal: having an electronic public currency. This is the true challenge for central banks and regulators: to offer families and businesses a public digital currency that increases their range of choices.


To learn more:

R. Auer, G. Cornelli, J. Frost, Rise of the Central Bank Digital Currencies: Drivers, Approaches and Technologies, CEPR Discussion Paper Series, n. 15363, 2020.

European Central Bank, 2020, Report on a Digital Euro, October, 2nd.

D. Masciandaro, "Central Bank Digital Cash and Crypto-Currencies: Insights from a Baumol-Friedman Demand for Money", Australian Economic Review, 51(4), 2018, pp. 1-11.

F. Panetta, "21st Century Cash: Central Banking, Technological Innovation and Digital Currency", in E. Gnan, D. Masciandaro (editors), Do We Need Central Bank Digital Currency? Economics, Technology and Institutions, SUERF Conference Proceedings, 2, 2018, pp. 23-32.


Donato Masciandaro is a Professor of Political Economy at the Bocconi University, where

he holds the Intesa Sanpaolo Chair in Economics of Financial Regulation. Since 1989 he

has written for the newspaper il Sole 24 Ore. Since 2005, he has contributed to Economia &

Management drawing on and developing his comments and analysis published in that

economic-financial daily.

[1] U. Bindsell, F. Panetta, "Central Bank Digital Currency Remuneration in a World with Low or Negative Nominal Interest Rates",, October 5, 2020.