A lot is happening with our money right now, from our migration into a cashless world and the roll-out of instant money transfers to the creation of a digital euro and the invention of new currencies in the United States, transforming how we spend.
That is indeed a lot. Can we start at the beginning?
Okay. Physical money originated about 5,000 years ago, when the Mesopotamians began using barley-based shekels for buying and selling. Then the Chinese minted coins some 3,000 years ago, followed by the Greeks and the Romans, who took it further and developed currency systems based around precious metals, including copper, bronze, silver and gold.
Then, about 1,000 years ago, the Chinese were back in the game rolling out bank notes based on promises rather than anything real. Fast forward to the Industrial Revolution when paper money really took off thanks to the English bankers who dispensed pounds, shillings and pence. The Americans joined the party not long after that. Ireland acquired a currency to call its own in the late 1920s when Lady Lavery made her debut on our notes. Then there was the punt and in 1999 the euro arrived, although initially in a virtual sense, and it wasn’t until 2002 that we got the actual notes and coins.
Um, when we said beginning, we actually meant the beginning of the recent changes
Ah, right. Well, you have the roll-out of Sepa instant payments earlier this month. As you will no doubt be able to tell, they offer real-time payment processing across all banks and payment service providers in the euro zone. Unlike the banking systems of times past – and by times past we mean four weeks ago – Sepa Instant does not need to rest at weekends or overnight or on bank holidays, and the money we move will travel at lightning fast speeds, no matter what time it is sent.
RM Block
But if it is moving this fast how can we be sure it is safe?
It will be harder for sure. If the money can go from Account A to Account B in 10 seconds that does not leave much time for erroneous transactions to be cancelled. But there have been some changes to the system avoid mistakes and to stymie the work of scammers.
What kind of changes?
Anyone making standard and instant payments under the new system will not only need the correct international bank account number (Iban) of the recipient but also the correct account name of the person or company getting the cash if a new payment or a standing order is to run as smoothly as planned.
How will that work?
When you are making the payment, you will be advised if there is a match, a close match or no match between the name you have and the name attached to the account.
And that will make a difference, will it?
This new verification of payee (Vop) step is an “added layer of security [that] will help customers ensure that their payments are going to the right recipient,” the Banking and Payments Federation of Ireland has said
This change is across the euro zone but are Irish banks doing anything new?
Early in the new year, AIB, Bank of Ireland and PTSB will roll out an instant mobile payments service they have called Zippay, which they hope will soften Revolut’s cough.
Why does its cough need softening?
It doesn’t, but it has been facilitating near instant money transfers for a long time now, and our banks have been laggards in the space.
And how will Zippay work?
Pretty much the same way Revolut does, to be honest. Bank customers will be able to send, request and split payments instantaneously using the mobile numbers of their contacts as long as they both have the service. Zippay should do away with the need for Ibans or any other bank details that are currently required.
And then there is the digital euro. What is that?
That is perhaps more complicated. “The digital euro, to keep it as simple as possible, is digital cash,” ECB president Christine Lagarde told a European Parliament committee earlier this month. “And cash is the remit of the [European] central bank. The anchor of our currency is central bank money. If the world is going digital, central bank money should go digital”.
But what does that actually mean?
Okay, the aim of the digital euro is to offer consumers across the EU a virtual wallet that they will be able to use to make instant payments and instant transfers to anyone anywhere in the euro zone.
I am confused, Can we not already make instant payments using Sepa Instant and Revolut and – soon Zippay not to mention Apple and Google Pay?
We can, but when the digital euro comes into being, that cash will be backed directly by the ECB, which means it will be free from the control of commercial banks, US credit card companies and big tech giants.
But where will this ECB-backed virtual money come from?
Oh, it will be your money. You are not getting anything for nothing. You will be able to set up a digital euro wallet on your phone using your existing bank account and then you will be able to load that wallet with cash taken from your existing bank account.
So, if we transfer all our cash into this new ECB wallet does it mean we won’t need banks any more?
Oh, we will. One of the issues that has been identified as a problem for the new digital currency is what happens if people take out all their money out of a current account with a commercial bank and deposit it in their digital euro wallet, particularly in a time of crisis.
But surely people won’t take money out of their current account and put it in a digital wallet if they will earn no interest?
You haven’t looked at the rate of interest you get on your current account for a while, have you? People earn no – or virtually no-interest on money in such accounts. But while a mass migration of money is at least possible the ECB is looking at limiting how much money people will be able to have in their digital wallets It has already stimulated what would happen if everyone with a bank account in Europe moved money from their commercial bank accounts to their ECB backed digital wallets in some class of big crisis and have estimated that if it caps the amount people can have in their euro digital wallet at €3,000, there most that could be withdrawn is e €700 billion.
That sounds like a huge amount of cash?
It is, but it is all relative and according to the ECB – €700 billion is about 8.2 per cent of all retail deposits in just over 2,000 banks across the euro zone.
But why would we want a digital euro anyway?
Apart from having money that is backed by the ECB directly – something that will have little or no impact on consumers as they go about their day-to-day business – the digital euros will still be usable even if you are not connected to the internet.
Is that important?
It might be. Remember when Storm Eowyn caused power cuts all over Ireland earlier this year, leaving people who relied on cards and contactless transactions without the means to make purchases? And then there was the blackout in Spain and Portugal in April, which left thousands of people without the capacity to spend.
“This event transformed cash from one payment option among many into the only means of payment for many of those who held it or could access it, as existing banknotes remained perfectly functional even when digital systems and many ATMs were inoperable,” noted a recent ECB economic bulletin.
But how will the digital euro function if we are all offline?
All your phone will need to do is be able to communicate with a payment terminal using near-field communication technology. That means access to the internet will not be necessary. Mind you, the two digital devices – your phone and the payment terminal – will have to be powered up, so there will still be problems if power is out for an extended period and you can’t charge your phone.
Are there any downsides to this digital currency?
Well, privacy is an obvious one. A European Parliament research note has pointed out that “online, every payment is visible to the [commercial banks] and the central bank, even if the central bank does not know the identity of the users. The [commercial banks], however, do” This is a conundrum because the ECB will want to ensure at least some privacy for consumers while combating money laundering and tracking terror activity online.
Ms Lagarde told the European Parliament that the digital euro will have to “navigate between these two imperatives: number one, making sure there is no money laundering, no financing of terrorism, and that the customer origin is well known. And number two, protecting the privacy of citizens. The promise is that the digital euro will be almost as private as banknotes – not quite, but almost as private as banknotes.”
And what is the time frame for this digital euro?
The ECB has been working on its digital version of the euro for several years, but the issue has become more pressing in recent weeks due to the US passing the Genesis Act, a landmark law that oversees the $288 billion (€248 billion) stablecoin market.
Ah here. Genesis Act? Stablecoin? What are you talking about?
Stablecoins are a type of digital token pegged one-to-one to a sovereign currency and backed by reserves such as government bonds. They are a little bit like cryptocurrency but a much less volatile.
So why is the EU worried about what the US does?
The EU wants its digital euro to compete with the US stablecoin, but for it to do so, it must first create it. EU officials are concerned that the Genesis Act may accelerate the already growing use of dollar-denominated tokens and undermine their efforts to preserve the single currency’s dominance in Europe.
And what does our Government make of it all?
It is in favour. Minister for Finance Paschal Donohoe, who is also chairman of the eurogroup of euro zone finance ministers, said recently that the “digital future of the euro is an essential part of its future. We are all now very conscious of public understanding and trust with regard to this project”.
