The European Central Bank is engaged upon the development of a common digital currency for use within the eurozone. The digital euro project is currently in the preparatory phase and is not scheduled for introduction until 2027 at the earliest, with a phased implementation. Since the European Central Bank initiated its planning for the digital euro in July 2021, progress has been made, but there are still several aspects to be resolved. Some of them have already been identified.
Table of contents:
- What is the digital euro?
What will the digital euro be used for?
What applications will the digital euro have?
Phases of the digital euro and next steps
Differences from cryptocurrencies
The implementation of the digital euro
What is the digital euro?
It would be advisable to emphasise that it is still in the preparatory phase and is therefore not yet fully formed. The European Central Bank (ECB) defines the digital euro as:
“A central bank digital currency, an electronic equivalent to cash, complementing banknotes and coins, offering citizens an additional payment option”.
(Source: European Central Bank)
The digital version of the euro will enable citizens of the 20 countries sharing the single currency to make digital payments in a secure and cost-free manner.
This electronic means of retail payment, to be issued by the European Central Bank, will be accessible to both individuals and businesses. It is designed to co-exist with physical currency, not to replace it.
In essence, the digital euro will function as an electronic purse or bank account, with the added benefit of being free to use and guaranteed as public money by the ECB, rather than by a private company. This ensures its security and stability.
What will the digital euro be used for?
The prevalence of electronic payments, facilitated by the use of cards, transfers and the decline in the use of cash, has been increasing in recent years. This trend has been particularly evident in the past four years, coinciding with the increase in on-line shopping.
The digital euro will be an additional vehicle for making payments, without replacing cash or current private payment methods. Its introduction will enable citizens in the eurozone to make payments digitally at any time and from any location, a capability that currently does not exist. For instance, in contrast to ‘Bizum’ in Spain, the digital euro would be accepted throughout the eurozone, thus ensuring that individuals can pay anywhere without encountering obstacles related to acceptance and without needing to withdraw cash.
What applications will the digital euro have?
The European Central Bank has already defined the operational framework within which the currency will function and the circumstances under which it could be employed.
Prior to the implementation of the digital euro, an e-wallet will have to be made available for the deposit of digital euros. This could be set up through a partnership with a bank or a public entity. In order to deposit funds, the digital wallet must be linked to a bank account. Alternatively, the funds can be deposited in cash.
The digital wallet will hold a limited amount of digital euros, which can be either kept in the wallet or deposited in a bank account. This can be done manually or electronically.
E-currency payments can be made immediately and securely in physical shops, online, or between individuals. Nevertheless, this is contingent upon the user’s location being within the eurozone.
Another potential use for the digital wallet is the facilitation of automated payments, such as those for monthly rent.
Phases of the digital euro and next steps
The project is currently in the process of preparation.
Although it originated from an ECB initiative, other bodies, such as the European Parliament and other European commissions and private entities, will be required to assess the feasibility and competitiveness of this novel electronic payment method. The potential implementation and mass circulation within the euro area will be contingent upon a multitude of factors that are not yet regulated.
The project commenced in October 2021. For a period of two years (until November 2023), it focused on research into the implications of a digital euro as an alternative form of payment to cash. This was done with the intention of facilitating the growth of digital transactions, which currently rely heavily on private entities originating from outside the European Union. This marked the commencement of the preparatory phase, which was expected to span a period of two to three years, potentially extending until 2025 or 2026. Subsequently, the regulations will be established, private sector partners will be selected, and preliminary testing may commence. Finally, a decision will be made about whether to proceed to the phase preparatory to the issue and circulation of the currency.
Differences from cryptocurrencies
The principal difference between the digital euro and cryptocurrencies is that the value of the former is guaranteed by the European Central Bank. The digital euro is subject to banking regulations and is issued by the European Central Bank.
In contrast, cryptocurrencies are based purely on the trustworthiness and credibility of the issuer. The units are created by users and are not subject to official regulation. They are therefore more volatile, their users are not backed by official entities, and they cannot currently be used regularly as a method of payment.
The implementation of the digital euro
As is often the case, there are currents of opinion that are in favour of the proposal and others that are less so.
In this instance, concerns have already been expressed regarding the manner in which privacy will be treated, given that all transactions will be recorded. However, the European Central Bank has highlighted the importance of privacy in its recent communication. The ECB has also begun to discuss the limitations on the amount of digital euros that will be accessible at the individual level.
The ECB’s primary objective is to develop a digital currency that offers benefits both to individuals and to businesses, in order to adapt to an increasingly digital market. This trend is being followed by other countries that are also creating or studying ways of issuing their own digital currencies.