Digital Euro: Is Money Becoming Part Of Our Digital Identity?
It should be remembered that in most countries - and therefore also in the eurozone - the monetary system has two levels: the national banks create what is known as fiat money. The banks supplement this with what is known as scriptural money. Since fiat money - unlike natural money (a commodity) - has no "intrinsic value", the government has to assign a certain value to a piece of paper or a piece of metal. Only then does the paper or piece of metal become money as we know it.
Centralised control
Commercial banks lend this fiduciary money in the form of scriptural money in exchange for acknowledgements of debt in the form of credit agreements. Scriptural money is therefore created artificially by granting credit. This money does not really exist, but represents a claim on the bank that manages the account. The importance of scriptural money lies partly in the purpose of saving, but mainly in participation in cashless payment transactions.
When we talk about the introduction of a digital euro, we are referring to central bank money (fiat money). We have already mentioned that the digital euro must above all serve to stabilise political financial systems.[1] It must prevent large withdrawals of bank deposits in times of crisis. Let's keep one thing in mind: if the ECB currently wants to change the interest rates on the official cash rate, it depends on the banking sector to pass on these changes. A digital euro will allow the ECB and central banks to manipulate interest rates directly.
But it's not just about interest rates. How would the digital euro differ from what we know today as "digital payment"?
Ananish Chaudhuri, Professor of Experimental Economics at the University of Auckland, recently summed up the dangers of a central bank digital currency:[2]
- Digital central bank money will be programmable. We talked about this in the third part of our mini-series.[3] It is true that the ECB will never issue programmed money. But it is to be expected that its use will be limited to "desirable" transactions. Undesirable consumer behaviour, such as long-distance travel or the purchase of addictive substances, could be made more difficult by not allowing payments in digital euros.
- Another problem is that the digital euro could theoretically have an expiry date until which the money must be used. This would give governments an effective way of forcing people to spend money in times of recession, thereby stimulating aggregate demand.
- State collection of citizens' biometric identification data is a major risk. In India, the state collects biometric data such as fingerprints, eye scans and facial photos as part of the Aadhaar identification system. The Indian Supreme Court has already restricted the use of this data, due to serious concerns about data protection and identity theft.[4]
Digital identity is a reality
But why go so far? The rules on the introduction of a European digital identity came into force on 20 May 2024. Parliament approved a provisional agreement with the Council in February.[5]
The aim is to ensure that a European digital portfolio is operational from 2026. This will consist of a mobile application distributed in each Member State. EU citizens and residents are promised that they will then be able to identify themselves securely online and access public and private online services throughout Europe.[6] As users of the digital wallet, they should be able to open bank accounts or make payments "under full control of their personal data".
It is simply nonsense to expect citizens to be able to exercise total control over their personal data via their application. The biometric data already collected by governments for passports and identity cards is regularly the target of hacker attacks, as shown by the examples in Germany[7] and Austria[8] . At the end of October, it was reported that the personal data of 815 million Indians was being offered for sale on the hidden web, including Aadhaar and passport data.[9]
This is another major risk linked to the introduction of the digital euro: not only the State or the bodies it authorises, but also criminals would be able to consult biometric data in combination with financial data. The transparent man is therefore a little closer to hand.
This article was first published in Courrier des Stratèges on May 27th, 2024.
[1] http://2f9bb33b.easyname.website/blog/the-digital-euro-we-need-facts-not-propaganda-part-2
[2] https://www.auckland.ac.nz/en/news/2024/05/22/reserve-bank-digital-cash--social-safety-net--or-big-b...
[3] http://2f9bb33b.easyname.website/blog/the-digital-euro-we-need-facts-not-propaganda-part-3
[4] https://www.scobserver.in/reports/constitutionality-of-aadhaar-justice-k-s-puttaswamy-union-of-india...
[5] https://www.europarl.europa.eu/news/de/press-room/20240223IPR18095/meps-back-plans-for-an-eu-wide-di...
[6] https://ec.europa.eu/commission/presscorner/detail/en/mex_24_2724
[7] https://www1.wdr.de/nachrichten/hackerangriff-legt-kommunen-weiter-lahm100.html
[8] https://zackzack.at/2022/06/15/kaerntner-hacker-leak-auch-reisepass-des-landeshauptmanns-im-darknet
[9] https://www.business-standard.com/india-news/aadhaar-data-of-millions-of-indians-put-on-sale-on-the-...