Nearly a year has elapsed since Ireland descended into the uncertainty and vastly changed financial landscape brought about by COVID-19. Even before COVID-19, FinTechs, such as electronic money institutions and payment institutions, offering innovative payment services and solutions, had revolutionised the banking and payments landscape. As noted in our March 2020 article (available here), COVID-19 was only anticipated to accelerate the growth of these FinTechs.
COVID-19 health restrictions have led to a surge in digital payments, with the use of cash continuing to decline. Four of Ireland's largest banks recently recognised this growth by coming together to create Synch Payments, an instant digital payments app. However, with a Competition and Consumer Protection Commission merger notification having been recently rejected, it may still be some time before we see an indigenous Irish payments app. However, this foray into the market suggests that online is where Irish banks see their future.
From an EU perspective, there are a large number of FinTechs projected to enter the electronic money market in the EU in 2021. This will likely see an increase in electronic money being moved seamlessly throughout the EU. Alongside this, new, largely unregulated forms of currency including cryptocurrencies such as Bitcoin and 'stablecoins' like Facebook's Diem, aswell as the issuance of digital central bank currencies by other central banks, pose increasing competition to the euro.
With this in mind, the EU have recognised the need to regulate this industry, not only through the regulation of FinTechs and cryptocurrencies themselves, but also by offering a secure electronic money solution to EU citizens. The EU's proposed competitor, or solution, is the digital euro.
With that background, we briefly consider key developments in this space, including the strides made by the EU towards a standardised digital currency – the digital euro, as well as future developments.
The Digital Euro
In our earlier article, we noted that Christine Lagarde expressed a desire on the part of the EU, to play an active role in developing a central bank digital currency. Since then, talks surrounding a digital euro have progressed. At a high level, the digital euro would be a universally accepted means of payment that would complement, rather than replace, physical cash. Indeed, Fabio Panetta of the board of the European Central Bank (ECB) has stated that the ambition of the digital euro is not to compete with commercial banks.
Following on from this, in October 2020 the European Commission (EC) published a report (EC Report) on the digital euro. The EC Report explored the potential design and risk factors associated with developing a digital euro. One of the more striking risks identified was the notion that the digital euro could have a negative impact on the financial stability of banks. The EC Report noted that the digital euro would reduce physical reserves held by banks and that in the event of a crisis, rapid withdrawals by consumers may result in their being a run on banks reserves. The EC Report concluded that in order to safeguard against this risk, it would be necessary for the ECB to control the amount of digital euro in circulation at any one time. Most recently, on 9 February 2021, the ECB suggested that there will be a €3,000 limit on consumer digital euro accounts in order to discourage the transfer of money from commercial banks.
In conjunction with the EC Report, the EC launched a consultation process on the digital euro, which concluded on 12 January 2021 having garnered over 8,000 responses across the EU. Amongst the key issues identified by respondents, was that of privacy, with 41% of respondents highlighting this as their key concern.
The next step for the EC and the ECB is to decide whether the digital euro is indeed viable into the future. It is expected that the two bodies will meet in April of this year to finalise plans for moving forward, or otherwise, with the proposal.
Is Europe ready to embrace cashless?
While Ireland's banks may be pushing ahead with plans to digitalise their offering and FinTechs continue to flourish, some have questioned whether Europe is ready to embrace a cashless society. It seems as though Christine Lagarde's proposal to have the digital euro complement physical cash is a more appropriate first step prior to eliminating cash. Some EU Member States are already well on the way to being cashless, for example in Sweden, cash payments make up less than 10% of total spending. However, wide discrepancies exist in the financial infrastructure of EU Member States and even countries with developed financial sectors are some way away from having the capabilities for the complete elimination of cash. Before the EU eliminates cash entirely, we must become comfortable with its non-existence.
What to expect next?
The April meeting of the EC and ECB is eagerly anticipated as it is likely that we will have a more concrete idea of the future of a standardised digital currency. Before we reach this point however, the EC and ECB need to address privacy and cyber security risks – factors that will likely be defining as to the viability of the digital euro.
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