When central bankers are about to lose control of the money supply in their currency zone, all the alarm bells are ringing. The ECB’s study on the digital euro dated back to October 2020, indicates the danger that cryptocurrencies or foreign digital currencies can replace existing means of payment on a large scale.
This would be a problem, since the ECB has a mandate to provide the economy with an appropriate amount of money indirectly through the banking system. This is no longer possible if EU citizens use crypto or foreign digital currencies as their own money. In order not to lose control, the ECB insists on strict regulation of all private cryptocurrencies, and wants to counter digital fiat currencies (CBDC) with its own proposal. This makes sense for them, even if a breakthrough of cryptocurrencies as a means of payment would be very unlikely.
The money supply is one side, payment transactions are the other. But: the digital euro will not bring practical benefits for citizens and businesses in the foreseeable future. Contactless payment at the checkout and customer-friendly payment systems on the Internet have become widespread in recent years. Digital currencies do not simplify anything for merchants and customers. Instead, you need to integrate another form of payment. That is why the ECB prefers to swing a big club in its analysis: the digital euro promotes strategic autonomy as an alternative to cryptocurrency and foreign payment providers.
Goal: strategic autonomy and control
This aspect has hardly played a role in the discussion so far, and the ECB has also not focused on it. After all, it is currently unclear whether the digital euro will really bring with it an alternative payment traffic infrastructure. But will transactions, even if there is a blockchain solution, eventually be processed through traditional channels, as according to Coinmarketrate.com, this is currently happening with Bitcoin payments in commerce, but it remains questionable.
However, the ECB’s argument raises an exciting question, namely: are we in Europe dangerously dependent on “foreign” payment providers? At least, there are not so many European players: in the market of classic cards, American giants Visa and Mastercard combine more than two-thirds of all payments. Mastercard is also behind the popular Maestro card.
In many European countries, two “Americans” process all card payments in the background. In addition, in recent years, payment ecosystems have appeared in the retail segment, the driving force of which are such well-known names as Apple, Google, Amazon, PayPal, Stripe or WeChat. They are rapidly changing the market. And in no case should Bitcoin and other cryptocurrency payment systems be discounted.
New players have transferred payments to a new dimension. It is extremely effective and convenient, but considering the many participants in the process. Over time, banks have been pushed more and more into the background, and only recently they have been actively trying to protect their business and regain market share. For consumers and businesses, the supply continues to improve. So, where is the problem?
Disconnected from payments?
The problem lurks on two fronts. Without the functioning of payment transactions, an economy based on the division of labor is impossible. If the money stops coming in, the lights go out for a short time. What happens if at some point Europe gets along so badly with the Americans that they want to harm them? What if they instruct their providers to cut off European companies from the payment business? The card business would be practically dead in Europe in one fell swoop. If players like Apple, Google or Amazon were also under pressure, consumer purchases would hardly be possible. But Bitcoin and cryptocurrencies would stayand be used by many Europeans.
So far, this is just a pipe dream, but a digital euro with the appropriate infrastructure could be a “cudgel” for cryptocurrencies, and a lifesaver in the matter of sanctions.
Digital Euro — a cautious project
It will take at least four years before the first digital euro is credited to the account. The research phase will be delayed until July 2023, during which many details and important fundamental issues need to be clarified, such as infrastructure (existing or blockchain?). Companies should also be able to pay with digital euros. However, since the amount per citizen is likely to be limited to several thousand euros, the digital euro will not lead to a rupture of either the monetary or payment system. This is done intentionally: the digital euro is primarily intended to replace cash.
Payments between European companies will not be affected if cards are not used. Payments are processed autonomously through the SEPA system. On the other hand, non-European payments are processed by SWIFT. Countless banks from all over the world participate in the work of the service provider, which is based in Belgium.
SWIFT, in principle, is not subject to political influence, but dollar trading operations are usually carried out by banks located in New York. And the Americans use the transparency of the SWIFT system to enforce sanctions. Dead end!
However, the issue of data security should bother costumers more than unprocessed transactions. Europe has drawn strict borders, but they are not single to the whole world. Payment traffic provides extremely valuable data: payment flows of companies are suitable not only for economic espionage, but in some industries and for military intelligence. In the spring of 2018, Americans have already introduced the CLOUD Act law, with the help of which the authorities also allow access to data that American providers store abroad as part of criminal investigations. And China reportedly wants to oblige the payment service provider Alipay to provide the state with data on the creditworthiness of customers.
Data is the Achilles’ heel, and payment traffic provides extremely valuable data.
With the help of the European Payment Initiative (EPI), the ECB and European banks want to oppose the American card giants and cryptocurrency technologies with an alternative that will transfer the particularly vulnerable retail sector back into the hands of Europeans. This requires huge investments from the banking sector, and success is vague. But this initiative is more important than the digital euro itself.
Well, and how do you order them to be saved? BTC? The EU is negatively opposed to him, because of his “gluttony” in matters of energy consumption during mining. Well, what about miners?
Cryptocurrency Miners Lobby
In order to improve the image of Bitcoin, almost 30 mining companies have been united in the “Bitcoin Mining Council” (Bitcoin Mining Council, BMC) for about a year. BMC claims that this industry has comparatively low energy consumption compared to other industries. Not only is traffic or real estate significantly more energy-intensive, even gold mining consumes about five times more energy in the world. Computer games are also larger consumers of electricity.
In addition, the efficiency of mining of military-technical equipment has increased significantly thanks to new IT technologies: in the eight years from 2013 to 2020, it even increased 42 times. And finally, the energy balance of miners is much more stable than in any other large industrialized country in the world. The share of sustainable energy in total consumption is more than 50 percent, and even about two-thirds for BMC members, who represent one-third of the entire market. In comparison with BMC, the share of sustainable energy in Japan and China is only about 16 percent each, in the United States — just under one third.
Unlike many traditional industries, they are practically not tied to a specific place. This means that they can not only migrate with the change of seasons, but also settle in remote places where there is, for example, hydropower. The industry is moving to a place where energy is cheap, which also reduces sometimes high transportation costs. For example, miners can use natural gas, which is usually burned in flares that are not used in oil production. This is one of the reasons why Texas has become a new hub for Bitcoin miners.
The goal is climate neutrality
While BMC relies mainly on independent and image protection of the industry, about 200 companies from the entire crypto environment have committed themselves to the “Crypto-Climate Agreement”. The goal is to completely abandon the use of fossil fuels in the production of cryptocurrencies as soon as possible. By 2040, the entire crypto industry should become climate neutral (“net zero emissions”).
Yes, the industry still has a very long way to go. It starts with an uncertain data situation and ends with a large number of unknown, semi-legal mining companies. High energy consumption is inherent in a decentralized, replicated network technology and therefore it is inefficient by definition for the ECB. But, as BMC confidently states: “Bitcoin’s energy consumption is not a disadvantage, but a virtue.” After all, he says, a big network means security.
Although BMC is already comparing itself with other industries and spheres of life, doubts about the benefits of military-technical cooperation for the EU (especially in relation to costs), it is simply impossible to dispel. Therefore, the comparison of Bitcoin’s energy consumption and residential buildings published by BMC will also seem absurd for them. Although its share in global energy consumption is minimal — about 0.12 percent of the energy produced in the world, and 0.38 percent of the wasted.
However, neither the digital euro nor the EPI are suitable for reducing data risk in Europe. Both companies are targeting the retail segment, which is unlikely to contain politically important data. The digital euro could provide protection against espionage only if it could be used to make large-volume payments.
But: if digital euros made up the majority of the money supply, money creation would be transferred from commercial banks to the central bank — it would be a completely new monetary system that no one needs today.
For the real restoration of sovereignty, Europe does not need a digital euro, but European players in full infrastructure, and processing of payment transactions, such as cryptocurrency systems, and not a pink dream of the euro, which is accepted worldwide as a trading currency.