The Digital Euro: Shaping the Future of European Payments
Europe is embarking on a transformative journey with the digital euro project, poised to revolutionize our payment systems much like the euro itself did. Currently in its preparation phase, this initiative is exploring the creation of a new, digital payment option accessible both online and offline. Imagine a pan-European digital currency, issued by the Eurosystem central banks, offering robust data protection and seamless usability across borders. This is the vision driving the digital euro.
The investigation phase has concluded, and we are now in the preparation phase, slated to continue until autumn 2025. A key aspect of this phase is rigorous experimentation to determine the optimal technological foundation for the digital euro. The exploration includes assessing blockchain technology, familiar from cryptocurrencies like Bitcoin, and the potential of tokenizing the digital euro, creating digital tokens representing value. The Bundesbank, for instance, expresses openness towards a token-based approach.
Crucially, the development of the digital euro necessitates establishing common rules and engaging all stakeholders. This includes central banks as issuers, commercial banks, financial service providers, retailers, and, of course, consumers. Public understanding and acceptance are paramount for the project’s success. Therefore, clear and accessible explanations of the digital euro, its benefits, and its functionalities are being developed for widespread dissemination.
While existing digital payment methods are functional, a truly European digital payment system remains absent. Consider the girocard, a prevalent payment method in Germany, which operates primarily within national borders. Although some cards may function internationally, transactions often rely on US-based payment processors like Mastercard or Visa. This dependence on international card systems highlights a crucial point: the digital euro aims to reduce reliance on these external entities and bolster European sovereignty in the financial domain.
The digital euro infrastructure will be based in Europe, and the rules governing its operation will be set within Europe. In the current geopolitical landscape, particularly following the war in Ukraine, the concept of sovereignty has gained significant traction, underscoring the strategic importance of a European digital currency.
Discussions are underway regarding holding limits for the digital euro. While figures like €3,000 have been mentioned, a more conservative cap is also being considered, with ranges currently debated from €500 to €3,000. It’s important to understand that this limit, potentially around five hundred euro (€500), would likely apply to holdings within a digital euro app or banking application, not necessarily restricting payment amounts.
For larger transactions, a “waterfall system” is under development. This innovative system would allow users to connect their digital euro app to their existing bank accounts. When making a payment exceeding the holding limit, funds would seamlessly transfer from the linked bank account to the digital euro app, facilitating the transaction. This mechanism mirrors the functionality of platforms like PayPal, ensuring usability for a wide range of purchases, from everyday items to significant expenditures like cars or furniture, even with a €500 holding limit.
Concerns have been raised by banks, particularly regarding the potential impact on their deposit holdings and lending capacity. However, these concerns are being addressed. Firstly, banks are encouraged to offer competitive deposit products to attract and retain customer funds. Secondly, the waterfall system ensures that customers can utilize the digital euro for payments regardless of their digital euro balance, mitigating the impact on bank deposits. Furthermore, the Eurosystem is committed to close collaboration with banks and payment service providers throughout the digital euro’s implementation.
While savings banks and cooperative banks have expressed skepticism, progress is being made to address their reservations. The legislative framework for the digital euro is becoming clearer, and the project continues to advance. The Eurosystem, encompassing the ECB and national central banks, will provide and fund the necessary infrastructure, operating on a non-profit basis. Banks will need to adapt their IT systems, but they will also gain revenue streams from the digital euro ecosystem.
Revenue opportunities for banks will arise from transaction fees, a common practice in payment systems. Currently, retailers often bear these unseen fees, which are distributed among banks and third-party providers. Notably, non-European payment service providers can command substantial margins. European legislators are actively establishing margin rules for digital euro payments, aiming for a balanced and competitive fee structure.
Importantly, the core functionalities of the digital euro are intended to be free for consumers. While retailers may incur fees, similar to existing payment methods, retail customers will not directly pay for using the digital euro. The goal is to establish the digital euro as a universal European payment solution accessible across all payment scenarios.
The digital euro is not intended to replace cash. Cash remains a fundamental payment instrument, and the digital euro is designed to complement it. However, cash usage is gradually declining, even in countries like Germany. As central banks within the Eurosystem, there’s a recognition of the need to offer a digital payment alternative alongside cash.
Despite the rise of digital payments, cash remains vital. Access to cash is still robust, with withdrawal options available at supermarket checkouts and petrol stations. Cash represents “freedom in action,” and the Eurosystem is demonstrably committed to its future, evidenced by the development and upcoming launch of the third, entirely new series of euro banknotes, planned for around 2029. This new series will feature updated designs and enhanced security features, reaffirming the commitment to cash.
Political support for the digital euro is growing. The current German coalition government has expressed its backing, and a significant portion of the opposition party also supports the initiative. Opposition primarily comes from parties who incorrectly perceive the digital euro as a move to abolish cash, a notion that is demonstrably false. In fact, regulations are being developed to further protect the role of cash.
Globally, the digital euro is part of a wider trend. Over 130 digital currency projects are underway worldwide. While some countries, like Jamaica, the Bahamas, and Nigeria, have already launched digital currencies, and China is in an advanced stage, Europe’s digital euro project places it among the leading initiatives globally.
Concerns about government control and surveillance, sometimes associated with digital currencies, are being proactively addressed in the digital euro’s design. Privacy is a central tenet. Eurosystem central banks will not have the capability to trace individual transactions or identify users. Stringent privacy protections are being built into the digital euro, with considerations primarily focused on complying with anti-money laundering and counter-terrorism financing regulations.
Looking ahead, the legal framework for the digital euro is anticipated to be finalized by the European Parliament and Council in the latter half of 2025. Following this, the ECB will make a final decision regarding the digital euro’s introduction. If approved, the digital euro could potentially be launched towards the end of this decade, following approximately three years of rigorous testing to ensure system security and reliability. The crucial decisions shaping the project’s final form are being made now, paving the way for a potentially transformative shift in the European payments landscape.