General ignorance over what a digital euro is means that Cypriots have no idea how its imminent introduction will impact every aspect of their lives
With the expected rollout of a digital euro within three years, a country report by the European Central Bank (ECB) has found that not only are Cypriots unprepared for it but most did not even know what it was or how it might impact their lives.
The ECB report, completed at the end of March, was a country focus on attitudes to digital currency as part of the bank’s investigation phase that is due to be completed at the end of next year and addresses key issues regarding design and distribution of the currency by 2025.
Unsurprisingly, the focus report found that most of the general public and even the tech-savvy in Cyprus “had not heard of the digital euro and did not know what it was”.
The lack of awareness is likely due to the association of digital money with cryptocurrencies like Bitcoin that don’t impact the daily lives of the majority of people. The digital euro, or Central Bank Digital Currency (CBDC) will, and it’s coming a lot sooner than people realise.
In addition, there has been no forewarning as yet from the authorities or any hint of broad consultations between financial authorities and the private sector, unless they are going on behind the scenes. Either that or it will be presented as a fait accompli.
A series of questions posed to the Central Bank of Cyprus on the issue, was answered in just four lines, confirming their engagement in the high-level European task force. “The project is now in the Investigation phase which is envisaged to be completed by end 2023,” the response said. “The Governing Council will then decide whether to proceed with the issue of the digital euro.” The email then merely provided a web link to the ECB. Pressed further as to whether the central bank had any opinion, comment or insights as to any unique challenges for Cyprus, or possible public reception for a digital currency, there was no further response.
The ECB focus report does provide some inkling beyond the fact that only people in the financial sector knew the difference between a digital euro and a cryptocurrency.
The digital euro will be legal tender, held by the central bank. It is being designed as an alternative form of cash, or basically your money, or some of it, on a smartphone, depending on the final role allocated to the commercial banks. It is possible they will be deemed intermediaries, where money, probably capped at €200 or €300 at a time, can be topped up from an account to the digital wallet for spending, rather than withdrawing cash from an ATM.
The aim is to get in on the digital game before private companies take over the market.
“If we don’t satisfy this demand, then others will do it,” ECB executive board member Fabio Panetta has said.
The ECB believes personal data managed by private fintech companies might not be as safe as it would be with the central bank, and of course illicit financial activity could continue to flourish and be hard to track outside a centralised mechanism.
While the one single advantage for consumers and businesses will be convenience, the benefits to the authorities will be myriad, from clamping down on money laundering, drugs, organised crime, to tax dodging and illegal employment.
At the same time, according to the ECB, there are no plans to replace cash, though all international policymakers see a cashless society at the end of the road because as long as it still exists, so will untraceable illicit activities.
Initially though, the digital wallet where the e-euro will be stored will just be another way of paying bills or shopping day to day. However, it is clear from the report, and from rollouts in other countries, that market forces will ultimately lead to the demise of cash because instantaneous financial transfers will be more convenient for both users and merchants. Convenience is what will create demand.
Cash will become a nuisance to traders who may impose a bank processing charge for accepting it. ATM’s will become scarce, pushing the public further. For consumers, queuing up at banks in Cyprus behind a shopkeeper with a bag of coins will become a bad memory. Since the pandemic, we’re halfway there anyway.
“Merchants in Cyprus reported an ever-increasing demand from customers to be able to pay using a wide variety of methods, and particularly digital methods,” the ECB report said. Digital wallet applications, particularly Revolut, were already increasingly being offered.
Tellingly for Cyprus, it added: “Revolut was also popular with owner managers as it allowed them to use their personal account without the need to invoice sales in the books to be taxed.” Hence, from the perspective of the authorities, there is a growing need for central banks to have control.
“We will need to accept it if it is used by many,” one merchant said in the report. “Nobody will force us to adopt it. We will be forced by the market.”
The report found that among the general public, younger professionals and students were more likely to use digital payment methods like mobile apps and smartphone-based payments, while older individuals and blue-collar workers tended to use more traditional payment methods such as credit/debit cards, cash, and online banking.
It was worth mentioning, the ECB said, that some in Cyprus had used mobile wallet applications from local banks but had then abandoned them as they were not widely accepted, “highlighting the importance of acceptance in this market”.
Some participants were more attracted to the idea of risk-free central bank money as they had greater trust in a central bank. “This is particularly the case in Cyprus and Portugal, which experienced commercial banking crises in the past, and for older participants, particularly those over 65,” the report said.
“You have the security of the central bank,” one participant said. “It is like you are transacting through them. With commercial banks in Cyprus, we still remember 2013”.
It was also important for the new method to be convenient and easy to use, with these aspects being more important to women, the focus group indicated. The tech-savvy liked the idea of the wallet being linked to their bank account.
Another key feature, especially for men and the younger age groups, was that the method could be used without internet access. This is one of the main challenges being worked on by the ECB in case of unforeseen catastrophies, but offline transacting is likely to be limited to small transfers so that illicit activity could not be conducted offline, it says.
“Those under 55 were the most open to a new payment method, while those aged 55+ and those lower on the socio-economic scale were resistant, as they are satisfied with current methods and did not see how this digital wallet would be better at serving their needs,” the ECB said.
Others in Cyprus viewed the digital euro in a completely negative light, saying it would give excessive oversight to governments and central banks to monitor all transactions made by private entities. There were also ‘Big Brother’ fears associated with the use of personal data on transactions and that the control of digital money might lead to political control.
This was particularly prevalent among the unbanked population who did not see any need for technological innovations in their payment methods.
“They viewed technology as hard to understand and manage,” the report said. This group often lived in rural areas and had limited internet use. Cash was their primary means of payment, although the pandemic had pushed them somewhat towards digitalisation, given the limits imposed on movement, including visits to bank branches. Banks in Cyprus had issued debit and credit cards during the pandemic, but this group only used them to withdraw cash from ATMs, it added.
“This group had no awareness or knowledge of the digital euro. They were concerned that this system would be imposed on them, and cash would be abolished – something they did not want.”
The ECB’s Panetta has made it clear there would indeed be a trade-off. “Full anonymity is not a viable option from a public policy perspective,” he said. “It would raise concerns about the digital euro potentially being used for illicit purposes.”
China’s digital yuan ‘is essentially a surveillance machine’
Privacy and the need for financial authorities not to overstep will be the biggest challenge for policymakers in the design of a CBDC, a Swiss expert told leading Cypriot economists during an online presentation earlier in the week.
The event on CBDCs was hosted by the Cyprus Economic Forum where management consultant Oliver Wuensch, a partner at Oliver Wyman and a former IMF official who was involved with Cyprus during the banking crisis, gave a lengthy presentation of his personal views.
One of the big concerns is whether the digital euro will be used only for transactions or whether it will be a currency that can be turned into savings, which would call into question the role of commercial banks, and perhaps result in a flight of deposits to the more risk-free central banks.
Firstly, policymakers will want to ensure that the official digital euro is the most attractive, otherwise there will be no preventing the emergence of other currencies “and this usually happens when the official currency is considered less efficient and stable”.
On top of that, there is no other digital currency that is universally accepted right now.
“Because currencies are a competitive business, in the end the monetary instrument that is most convenient most stable most secure, will be the one that that wins,” Wuensch said.
Wuensch said that without something to distinguish it, the CBDC would be no more than just another payment system and he believes the market is already well covered in that respect.
“Most individuals and businesses have access to bank accounts, debit or credit cards and other means of non-cash payments. The value added of CBDCs as a pure means of transaction actually is very limited,” he said, adding that it might even be inconvenient for people to have to keep ‘topping up’ their digital wallet.
“In the eyes of the end users, it is a complex system that simply does not offer material benefits over today’s bank accounts and payment systems,” he said.
There is also the question of privacy, not only from private-sector providers whose cloud systems have demonstrated data vulnerabilities “which could cause entire economies to grind to a halt”, but also from the authorities.
“If you look at the Chinese approach to the to the digital yuan, it is essentially a surveillance machine,” Wuensch said. “Do we want this, yes or no?”
He said there was a European Parliament committee working on a new anti-money-laundering framework, saying they were taking a zero-risk stance on all digital currencies meaning “regardless of the amount, whether it’s one cent or 5 million euros, it needs to be traceable”.
“The ECB has commenced very extensive studies on what features a CBDC or digital currency would need to have in order to be accepted. And here it has been clear that privacy is one of the most important features that they [users] expect from a digital currency,” Wuensch said.
“And now you can see that there is a clear conflict between policymakers and the legitimate interests of legitimate economic agents. One of the questions that we will need to ask is whether we want to design a monetary or financial system where the intervention of policymakers is further facilitated, or whether we want to have a system that is actually a bit more on the on the liberal side.”
Aside from all the details that still need to be worked out at a policy level, Wuensch is certain that cash will gradually be replaced by market forces.
Switzerland, he said, is looking at 10-15 years for the complete demise of cash but the ECB “has a much more aggressive time plan”, he said.
Despite the fact that cash retains advantages such as being usable without electricity or internet, nevertheless, its days are numbered because “you can’t turn the clock back on technology,” Wuensch said.
The tipping point will be when the use of cash on a daily basis for transactional purposes “will have reached a level which does not allow for keeping up the physical infrastructure that you need, for instance, ATMs, cash logistics and so on,” he said, citing the cost of transportation, the cost of security and the cost of storage.
“It will be when physical cash is reduced to a point where it’s not viable for the economy anymore.” More ominously, Wuensch added: “The less prevalent the use of cash becomes the more suspicious cash use will become.”
Totally cashless: The implications
- The personal choice to use cash for whatever reason will be no more.
- People who have resisted owning a smart phone will also no longer have a choice but to get one.
- Digital technology can be vulnerable to criminals but muggings, robberies and burglaries might become pointless endeavours
- Someone could lose their phone and have no immediate access to money.
- A major cyberwar or EMP attack globally, or ransomware attacks on financial institutions, a banking crisis, or a major weather event that damages the system for an extended period, can’t be ruled out. The World Economic Forum keeps warning about cyberattacks ‘being the next pandemic, greater than Covid’, yet relentlessly promotes the cashless society.
- A government which has total control of the population’s money can do whatever it wants, even quash dissent, and even in the liberal West. Recently Canada’s, Justin Trudeau froze the bank accounts of protesting truckers, and those who donated online. If cash no longer existed, they would have been more than a little inconvenienced.
- Further down the line, the digital wallet could be merged with all of a person’s other information, including health details. It could replace ID cards and passports because it would ‘make sense’. New internet regulations could ultimately require a digital ID to even log on to the web that will by then be devoid of any alien conspiracies and be no fun anymore.
- Digital currency is ‘programmable’, meaning the authorities can dictate how and when you can use it if they so wish.
- Australia is currently running a pilot scheme where welfare beneficiaries are given 80 per cent of their benefits on a card but they’re not allowed to buy booze, gamble, buy gift cards or take out cash to ensure that payments are spent in “responsible and meaningful ways and reduce high levels of social harm.”
- Programmable digital money could also be the slippery slope to China’s full-on social credits scheme. The Mayor of Bologna, Matteo Lepore, is launching a digital wallet with a reward scheme to help change climate behaviours. At the centre is the “virtuous citizen”, he says “the one who recycles, doesn’t waste energy, uses public transport or incurs fines”. It’s a useful voluntary scheme but how long before it’s mandatory and ‘unvirtuous citizens’ start to get negative scores?
- American Express is already running a voluntary ‘carbon footprints’ tracker. It cuts you off when your carbon credits have reached their limit for the week/month. If you try to buy too many avocados from Peru, payment is cut off and you will have to do the walk of shame back to the fruit and veg section.
- With the programmable wallet, air travel and petrol consumption could also be rationed in the same way.
- What comes after all that? Ask the Swedes. Reportedly, around 7,000 of them so far are loving their implantable ID chip… because carrying devices is such a hassle.