The Digital Euro – A Ghost Story

I didn’t sleep well last night. Like a child who reads a ghost story at bedtime, I was having nightmares about something scary I’d read – the ECB’s report “A stocktake on the digital Euro”. Published to support their decision to move to the preparation phase for the currency, it is not recommended for the faint of heart.

Halloween ImageAmong the many spine-chilling aspects of the report, I’ll focus on just one, which highlights the spooky nature of this imaginary currency. Digital Euros are going to be held in accounts operated by PSPs (roughly speaking, banks). Digital Euro accounts are separate from normal Euro accounts (a digital Euro account is identified by a DEAN instead of the non-digital IBAN). An individual can hold only one digital Euro account – not one per PSP, just one per individual. Cue a central database so when someone tries to open a digital Euro account, PSPs can check if they already have a DEAN. (The central database will also be needed because the proposal revives the old hobgoblin of Account Number Portability – dead but it won’t lie down!)

As well as only owning one account, there will be a limit on how much an individual can hold in that account. You may think that makes the account a bit useless, especially for payments, but no! The digital account can be linked to a normal Euro account, and funds will be swept between the accounts as necessary (known as ”waterfall” when converting from digital to normal, and “reverse waterfall” in the other direction). So now the consumer has two account balances to worry about instead of just one. (By the way, the fact that the PSP can convert to and from fiat on your behalf implies that the digital Euro account is some form of custodial wallet, with all the security headaches that brings).

For businesses, the good news is you can hold more than one digital Euro account. The bad news is you can’t hold any funds in the accounts! (Sorry for the jump-scare). Once again, it’s waterfalls to the rescue. So if company A sends 100 digital Euros to company B, the sender’s PSP will debit 100 euros from Company A’s normal Euro account and convert it to digital Euros (reverse waterfall). The digital Euros will fly across the payment rails and when received by company B’s PSP, they will be converted back into normal Euros and credited to company B’s normal Euro account (waterfall).

You’d be forgiven for asking what was the point of converting to and from digital Euros. Companies can already use SCT Inst to transfer euros instantly, why introduce another mechanism? Watchers of this space will not be surprised to learn that there will be a new set of pan-European “digital Euro payment rails” which are not operated by non-European companies, and they will support card transactions. Yes, this horror story is yet another sequel about the pan-European card scheme zombie – every time it seems to get killed, it simply mutates and comes back to life!

And so we arrive at the dark heart of the nightmare. Today I can do a B2B transfer from IBAN to IBAN. Tomorrow I will do a transfer from DEAN to DEAN which will result in exactly the same transfer from IBAN to IBAN. Like a fleeting ghost, the digital Euros appear and then immediately disappear again. Digital Euros and a new set of payment rails are involved, but my user experience is identical.

To support this non-event, every player in the payments industry the industry will have to introduce massive and expensive new infrastructure. PSPs will have to manage two Euro liquidity pools, a digital pool and a fiat pool, and connect to new payment rails as well as the old ones. Consumers will have two account balances to worry about instead of one, and two payment cards. And because the digital Euro will be legal tender, everyone will have to accept it. At a time when people are struggling to make ends meet, I find the idea of spending billions on this vanity project very scary indeed. Let’s hope it remains in the realm of fiction.

Watch now: Tom Hay’s Digital Euro – A Ghost Story!

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