Spain-Portugal Power Outage Shows Digital Euro is a Big Problem

The blackouts across Spain and Portugal were widespread, unprecedented and exposed an uncomfortable truth: a digital euro could be extremely problematic.

Phone and internet signals either vanished completely or were exceedingly intermittent as people tried to reach their loved ones.

But those attempting to buy supplies at supermarkets had a bigger problem: card machines no longer worked, and many ATMs didn’t have power.

Those lucky enough to have a substantial amount of cash in their wallet were largely unaffected — but countless others, who rely on their phones to complete transactions, found themselves in a tricky situation.

Incidentally, my wife Maddie was among them. She had been enjoying a long weekend in Madrid and was on the Metro when her train plunged into darkness. Half an hour later, she evacuated the station after climbing up 15 flights of stairs.

Above ground, she began to realize the extent of the power outage. Thousands of people milling in the street had nowhere to go, traffic lights were out, bars and restaurants had no way of serving customers.

She had been on her way to the airport at the time to fly home — and rang me in a panic because she had just €15 in her purse and no internet access. I was in London — trying in vain to book an Uber on her behalf with no luck.

A kind-hearted couple in the taxi rank had offered to let her ride in their cab, but none came. Stranded for hours, she eventually got a bus… but missed her flight.

Maddie will have been one of thousands — millions — who were in a similar, panicked situation yesterday. And given how this blackout came out of nowhere, it’s worth contemplating what would have happened if a central bank digital currency had been in operation at the time.

The European Central Bank says that the digital euro will support offline payments, primarily as a privacy measure, meaning personal details would remain between the two people involved in a transaction. But all of this is a moot point when devices are unable to operate because of a lack of electricity.

Spain has also been embarking on a clampdown of cash in recent years, with the goal of slashing tax evasion and money laundering. That means it’s now illegal for a business to accept more than €1,000 cash in a single transaction. Such measures come despite ECB data showing that physical banknotes are used for 57% of payments by Spanish consumers.

This power cut was also foreshadowed by a warning from Sweden’s central bank, which advised all of its citizens to have enough cash at home to cover a week of essential purchases in case payment infrastructure went down.

The ECB has been betting the house on a digital euro — describing it as a key part of the continent’s future against a backdrop of economic uncertainty. Yet this CBDC remains pretty unpopular, with just 45% of those polled in a recent survey saying they would be willing to use it. That figure has remained unchanged even as awareness grows.

For consumers, this reluctance lies in how the digital methods already available to them — contactless payments and Apple Pay — do the job pretty well. Meanwhile, critics are sounding the alarm that this CBDC could erode privacy… with some conspiracies flying that it could be used to control what people buy.

Monday’s blackout could prove to be a devastating setback for the digital euro campaign — all while reigniting the public’s love for cash, which diminished hugely during the coronavirus pandemic.

And it also raises uncomfortable questions for the crypto and fintech firms pushing stablecoins as a payment method fit for the 21st century. While the touted advantages include faster transfer times and distance from central banks, they would be just as exposed in the event of a power cut.

It’s far less likely to affect the narrative for Bitcoin, which is a terrible way to make everyday payments because of how volatile it is. After all, it can be held as a store of value throughout a power cut — just like gold.

The lights are now back on in Madrid, and things are slowly returning to normal. But make no mistake: consumers will now be thinking very differently about cash, and the ECB’s push for a digital euro just got a lot harder.