Digital euro: Why Our Cash is Coming Under Pressure

Around the world, there is currently a veritable race to introduce digital central bank currencies. The idea of replacing cash with digital tokens is more than tempting. But what happens when the power goes out? For this reason, the Swedish central bank has now called on parliament to create the legal framework for a mix of analogue and digital means of payment. But our cash is not only threatened by the digital euro. The institutions in Brussels and the banks are working hard on various fronts to significantly restrict the availability and possible uses of cash.


When it comes to digital money, there are few topics that concern people more than the question of whether this will lead to the abolition of cash. The ECB emphasises that this will "under no circumstances" be the case and refers to the legislative proposal [1] and the current report on the exploratory phase [2]. However, this will not allay the concerns of businesses and citizens, as cash will lose its usefulness if it can no longer be used. It is worth remembering that the standardised upper limit for cash payments in the European Union of 10,000 euros is coming. The official reason for this is to combat money laundering and terrorist financing.[3]

Danger of a blackout

This new regulation obliges financial institutions, banks, real estate agencies, asset management services and traders to act as "gatekeepers" and assist in the "detection of suspicious activities". The new regulations will also cover most of the crypto sector, forcing all crypto-asset service providers (CASPs) to conduct due diligence on their clients.

It is therefore to be expected that the number of service providers that still accept cash at all will continue to decrease. For retailers, for example, it will become more complex - and possibly problematic - if payments are accepted in cash.

Sweden is one step ahead in this respect: the state-owned Riksbank has been researching the usability of a digital central bank currency since 2017. Tests of transactions with the e-Krona token began in 2021 - for both large commercial and small retail payments. In 2022, the Riksbank, together with the Norwegian central bank, Israel and the Bank of International Settlement, launched a test for cross-border payments in digital central bank currency.[4]

However, uncertainty is now spreading at the pioneer of digital central bank currency as to whether the complete abolition of cash in favour of a digital central bank currency could entail incalculable risks. The energy crisis, exacerbated by Russia sanctions and the Green Deal, is making blackout scenarios increasingly likely. The idea that the financial system would then suddenly only run on emergency power generators does not seem to sit well with the Swedish Riksbank either.

The deputy governor of the Riksbank, Aino Bunge, therefore recently called on the Riksdag to take care of this in the form of a legal regulation. Digitalisation would have contributed to innovative, fast and convenient payment solutions. However, this development has also brought with it problems such as financial and digital exclusion. Digital systems would have to be resilient so that payments could be made even in a crisis situation or in a state of heightened alert, for example if power and data communication were no longer working.[5]

Cash destruction

Nevertheless, there is increasing evidence that cash is gradually becoming "scarcer" - either because it is no longer accepted or because access to it is being made more difficult. In Germany, Postbank (a subsidiary of Deutsche Bank) announced a few weeks ago that it will stop issuing cash completely at the end of 2025 as part of its cost-cutting measures.

The winners of a cashless payment world would be the banks and credit card providers. They save on expensive infrastructure costs and collect between 0.2 and 0.3 per cent of sales from each payment transaction from the retailer.

And there is another very, very weighty argument in favour of reducing cash stocks as quickly as possible. There are good reasons why this argument is not often mentioned in public discussions:
Until the 2007/08 financial crisis, the central bank money supply consisted mainly of banknotes and only to a lesser extent of sight deposits. As a result of the ECB's monetary and interest rate policy, the national banks have greatly overstretched their sight deposits in order to keep the financial system liquid. However, this means that the fewer cash reserves the banks hold per loan, the greater the risk of slipping into illiquidity if more deposits are withdrawn than cash reserves are available. Conversely, this means that if the public holds less cash, more central bank money remains for the banks. And the banks need this so that they can improve the money creation multiplier, i.e. the ratio between the public's money supply and the amount of central bank money. Only then will it be possible to do real business again.

This article was first published in Courrier des stratèges on April 18th, 2024
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