Monetary innovation

14 July 2023 Blog

As the world we live in continues to change, we should not be suprised to see further innovation in our understanding and expeirence of money
Any history of money would probably include references to cowrie shells, to Mesopotamia, to silver and gold, to Aristotle, to paper money in China and polymer banknotes in Australia, to units of account, mediums of exchange and stores of value, to public and private money and, of course, to plastic cards and all things digital. But, however tempting, I don’t have the space to do justice to that history in this blog. It’s probably enough to say that, over the last 5000 years, the concept of money has seen innovation and adaptation. Money is a social convention as well as an enabler of economic activity. And as the world we live in continues to change, we should not be surprised to see further innovation in our understanding and experience of ‘money’. In particular, as digitalisation transforms the way we live, the financial system has, is, and will continue to adapt to its changing environment.

We’ve seen this in our own experiences of paying for goods or services, and our ability to do so using cash or plastic cards or digital tools. We are, in fact, increasingly opting to pay through different electronic means of payment. The latest survey on the Payments Attitudes of Consumers in the Euro Area makes clear that cash usage is declining in some Member States. In 2016 and 2019, 79 and 72 per cent of the total number of transactions at points of sale – such as shops and restaurants – were made in cash. In 2022, cash usage had fallen to 59 per cent of the total number of transactions across the euro area.

The move away from cash also represents a move away from ‘public money’ which is, essentially, money issued by the state to its citizens for everyday use. In Ireland, the notes and coins that we use to make transactions are denominated in Euros and issued by the European Central Bank. Such public money is only available in the form of physical cash.

But the vast majority of the money held and used by people in Ireland and the rest of the euro area today is not physical ‘public money’ but, in fact, digital ‘private money’ issued by commercial banks. Most of the funds that individuals and households hold are now held as bank deposits rather than cash.

It is reasonable to assume that it’s mainly central bankers who are aware of the distinction between private and public money. Most people are not particularly interested in the type of money they use which, in my view, reflects the fact that they have confidence in the money they use regardless of its issuer and form.

This is a positive outcome, reflecting the strong regulatory and oversight frameworks and deposit protection measures in existence in the euro area (with the ECB ensuring the stability of the value of the currency, strong regulation of commercial banks that issue money to ensure they are robust, and national deposit guarantee schemes that protects holders of commercial bank money should the bank fail). We know from history that confidence in the institutional framework governing money is something that has to be earned and cannot be taken for granted.

Change and continuity

The changes that we have seen in the concept of money through history have often come from the interaction of technological innovation that has improved its functionality. The move from metal to paper, for example, made it more convenient to use. In more recent years, convenience (and, during the pandemic, health concerns) has fuelled the public’s appetite for digital money. And as the only digital money available to the public is ‘private’ (commercial bank) money, the shift from physical cash to digital payment has meant a shift away from public money.

I think this matters. As of today, we do not have a digital retail means of payment that is accepted across the entire euro area. Instead, retail digital payments are facilitated on (non-European) payment infrastructures that are operated by private external providers with transactions taking place in private or commercial bank money. This private money is used to widely represent public money in transactions and is backed by its 1:1 convertibility with public money as the money anchor (and, to repeat, the fact that citizens may not easily distinguish between public and private money is a good thing).

To preserve the role of public money in light of citizens’ increasing demands to pay digitally, the ECB and the 20 national central banks of the Eurosystem have been exploring the possibility of launching a digital euro that would complement and function alongside cash. It is important that central banks keep up with a world that is becoming more digital. And a digital euro would offer citizens (and businesses), an electronic form of public money that is safe, instantaneous, widely accessible and usable everywhere across the euro area.

But, despite the increasing use of digital payments, cash remains the most frequently used payment method in the euro area and we remain committed to cash and to developing banknotes for the future that are innovative, secure and an efficient means of payment. The majority of people across the euro area want to keep the option of paying for goods and services with banknotes and coins.

Two recent announcements highlight the change and continuity that is a constant thread in the history of money.

First, the ECB is looking to develop a new series of banknotes that aim to ensure inclusivity for all Europeans, prevent counterfeiting and reducing the environmental impact throughout their life cycle . The Euro banknotes are tangible symbols of European integration, reflecting our shared values and we want citizens to be part of the process in designing their future ‘look’. (You can use this survey to give your views on the new design of the banknotes; the chosen design will be made public in 2026.)

Second, last week the EU Commission published its legislative proposals to ensure that people have both cash and digital payment options when they want to transact with public money. The aim is to safeguard the role of cash and ensure it is widely accepted as a means of payment for people and businesses across the euro area while enabling a digital euro to complement to physical euro banknotes and coins (giving additional choice, on top of current private options, to pay digitally with a widely accepted, cheap, secure and resilient form of public money in the euro area).

If a digital euro is issued – and a decision on this is some time away – it would have legal tender status similar to cash.  Citizens could pay online, shop in stores or send money to friends and family with basic payment services expected to be offered free of charge. In terms of its distribution, the digital euro would be available through the current providers of digital payments today and would also have the ability to operate in an online and offline capacity. In an offline scenario, users could still initiate payments through their devices and enjoy cash-like privacy. (Protecting privacy is one of the most important design feature considerations of a digital euro).

The ECB will not have sight of any of the users’ personal details or their payment patterns but we will need to ensure that an appropriate balance is found to ensure the highest degree of privacy exists but also that public policy objectives such as Anti-Money Laundering (AML) are maintained.


Monetary innovation is one of history’s constants. Whether it’s the design of new banknotes or the creation of a digital euro or just the pace of innovation and change in the financial payments sector, we are excited to play our part in continuing to maintain a strong role for public money in the interests of the EU’s citizens and economy.


Gabriel Makhlouf

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