Digital euro - what's behind it

When will the digital euro arrive? And what exactly is behind the digital currency?

The European Central Bank (ECB) plans to decide in mid-2021 whether and in what form the digital euro should be introduced.1 ECB President Christine Lagarde expects that citizens in the European Union will already be able to shop with the digital currency in five years, as the central bank chief announced in January 2021. The digital euro could make payment transactions easier for consumers and companies.

Why is the topic of the digital euro becoming increasingly important in Europe?

Central banks' own digital currency as an answer to Bitcoin and Libra? The European Central Bank (ECB) wants to introduce the digital euro to protect the stability of the euro against cryptocurrencies such as Bitcoin or the Facebook currency "Diem" (originally Libra) as well as digital currencies of other countries, thus strengthening Europe's digital sovereignty.

Other central banks are already much further ahead than Europe in terms of digital central bank currencies, so-called "Central Bank Digital Currency" (CBDC). China has already put the digital yuan into circulation in selected pilot regions in 2020. The Swedish central bank has launched the "e-krona" pilot project, which is to be extended until 2022, according to media reports.

What does the digital euro mean for commercial banks and the ECB?

The way the European Central Bank (ECB) is currently discussing the digital euro, the digital currency would be a supplement to European cash and thus an additional payment method that would be available to citizens and businesses.2 However, the digital euro is not intended to replace traditional cash, but to continue to be available.

This much is already certain: When the digital euro arrives, it will be issued, protected and regulated by the ECB just like euro cash and would therefore be equally trustworthy. Just like euro coins and bills, the digital euro would be generated by the principle of money creation by the ECB and commercial banks.3 Commercial banks would be able to offer their customers the European digital currency for their credit balances in addition to bills and coins. However, the digital currency would be booked separately from the money in checking accounts in a special account at the central bank. The central bank would therefore retain control over the digital currency and thus guarantee security and stability.

What added value would the digital euro have for consumers and how could it be stored?

One of the biggest benefits of the digital euro would be split-second payments that would be equally secure as with European cash. Security could be ensured, for example, through a blockchain approach. In addition, the privacy of the purchaser would be preserved when making purchases in the same way as when paying with coins and bills, since no personal data would be transmitted.

The digital euro would be stored in a kind of virtual wallet.3 When making a purchase, for example, the money could be transferred from the buyer's wallet to the seller's wallet using an app or a QR code. This would be possible both online and offline, the latter using technical solutions such as Bluetooth. These procedures would be significantly simpler and faster than, for example, a SEPA transfer.

How could companies use the digital euro?

Among other things, the digital euro could bring benefits to the economy in terms of cross-border payments. Money transfers to other countries, for example, which currently take several days, would be possible within a few seconds.

With regard to the advancing digitalization of business processes, a digital euro based on blockchain technology could be useful. In this way, networked machines and devices in the so-called Internet of Things (IoT) could independently book and pay for resources or services among themselves.

What risks could the introduction of the digital euro entail?

Critics fear that the introduction of the digital currency could make commercial banks more financially unstable. The scenario: customers who do not trust banks or are insecure withdraw their money from their traditional accounts at commercial banks and park it in digital accounts at the central bank. Large sums are thus transferred from the banking sector to the ECB. And that, in turn, could lead to a liquidity crisis in the banking system.

To prevent such risks, various mechanisms are currently being examined, such as threshold amounts or a two-tier interest system.