The digital Euro - taking shape in 2022

FinTech Perspectives

The European Central Bank (ECB) has just kicked off an “investigation phase” to explore different options for the digital Euro. This phase of detailed consideration for a European version of a Central Bank Digital Currency (CBDC) ushers in a new phase in the Euro’s history - 20 years after its initial launch on 1 January 2002. Complex questions and difficult choices lie ahead. The right balance needs to be struck to make the digital Euro robust, easy to operate and, at the same time, not a full replacement of either cash or bank money.

In this issue of our FinTech Perspectives, we will discuss the structural choices that the ECB will face during its investigation process. As we will show, the different options are wide ranging and imply very different qualities of Europe’s future digital currency.

The European Road to a Central Bank Digital Currency (CBDC)

Most Central Banks are in the process of evaluating, designing or even launching a digital version of their official currency – as an alternative means of payment on the basis of a crypto token. An up to date overview of the current status of all CBDC projects can be found at To name just a few:


  • China has been experimenting with the Digital Yuan (or Renminbi) since 2014, launched a  pilot in  four major cities in 2019 and is now expanding it to six further cities, including Shanghai.


  • Likewise, Sweden has moved from a pilot regime with simulated participants to try the e-Krona now with a small number of real-life market participants.


  • A number of Latin American countries are particularly interested in CBDCs. In the Bahamas, the Bahamian “Sand Dollar” has already gone into operation and seems to work as a means of payment of all sorts – now extending to include payments of certain salaries. As with some of the official currencies in this region, there is a certain tendency to peg or even denominate the respective digital currency in the US Dollar as did Ecuador with their Dinero Electrónico, which was a functional CBDC for mobile payments in that country from 2014 to 2018. None of these CBDC initiatives should be confused with the path that El Salvador has chosen – to bestow Bitcoin the status of “legal tender”, ie the status as fully legitimate means of payment. As we will see, crypto currencies such as Bitcoin on the one side and CBDCs on the other side are quite distinct in nature and application.


The ECB joined the club of CBDC-exploring central banks relatively late. In January 2020 it set up a task force, mainly in reaction to the growing relevance of stable coins – and their challenge to the Euro as means for payment in e-Commerce. In October 2020, it published a “Report on a digital Euro” which can be seen as guiding document for all onward considerations. In August 2021 it decided to go ahead with the project and in October 2021 it kicked off an investigation phase which is meant to run during 2022. The plan is to build on these findings and work out a design for the digital Euro in 2023. If all goes according to plan, 2024 could be the year of test pilots and the digital Euro may go live at any time from 2025 onwards.

The Digital Euro as a means of payment

Before we look into the choices that need to be made, there are a few characteristics that the digital Euro will share with most other CBDCs. These characteristics can best be explained in comparison to all other means of payment:


  • Cash - the digital Euro is envisaged to work in a similar way to cash: Like Euro bills and coins, the digital Euro provides a direct claim against the European Central Bank. That makes it immune to any insolvency or other instability of a bank or any other intermediary.

Unlike cash, however, it will be used digitally and in a programmable form – which should make it suitable for smart contracts and any type of e-Commerce transaction. Another difference to cash is the digital Euro’s level of privacy. Although much debate will go into its specific level of privacy, it is safe to say that a payment made with a digital token can hardly ever be set up as anonymous as a payment by cash.


  • Bank money is the money customers hold on their bank account. Unlike cash or the future digital Euro, it represents a claim against the bank and is thus always dependant on the solvency and functionality of that bank. Although there is online banking, bank money is complicated to handle in e-commerce let alone its unsuitability for smart contracts.


  • E-money is similar to bank money as it fully depends on the e-money institution that it issues. And whilst it has come into existence to support e-Commerce transactions, it cannot easily be linked to a smart contract and thus struggles with a functionality that one would expect from any crypto token – as a native digital asset.


  • Stable coins are crypto currencies that intend to eradicate the volatility that make Bitcoin and Ether a rather unattractive means of payment. There are many different types of stable coins – issued by a regulated institution and pegged to an official currency (such as the JPMorgan Coin or Diem (formerly Libra)), fully decentralized issued (such as Tether or TrueUSD), backed not by official money but other cryptoassets (such as DAI) or commodities (such as USD Gold) or even a mere algorithm (such as AMPL or Frax).

As stable coins are native digital assets with a particular focus on value stability, they share a number of qualities that the future digital Euro should have, including their viability to serve as uncomplicated means of payment in a fully digital environment. The main difference between the digital Euro and a stable coin consists in the fact that the latter are not backed by a central bank and thus dependant on the functionality of a system that is either run in a decentralized way or by a private institution. With some simplification, one could say that the digital Euro shall be similar to a stable coin with the notable difference that it is issued and administered by the ECB.


  • Other cryptocurrencies such as Bitcoin, Ether and the like do not really serve well as means of payment. Typically, they are too volatile. Also, they are to date not really suitable for the enormous amount of small payments that needs to be handled on a daily basis. As things stand at the moment, established crypto currencies are better suited as a means of investment. Changing this is the aim of some crypto techniques - none of which have a high market penetration as of yet.


Shaping the digital Euro

In its Report on a digital Euro, the ECB has already determined a number of principles and qualities for the digital Euro, such as:


  • It shall be a means of payment, not of investment. That has far-reaching consequences. It requires that hording an “undue” amount of digital Euro needs to be prevented – possibly by some technical features such as ceilings per account holder or levies that rise with the amount of digital Euro on account.


  • It shall be an attractive alternative to cash. In order to make this viable also outside e-Commerce, solutions for off-line payments shall be found. That is not a small task as it will require devices that store the relevant values in a secure way during offline time.


  • It should have all the features of stable coins, including their programmability. In other words, the digital Euro shall function as a crypto asset that can by integrated into a smart contract solution – that is, in payment transactions that are fully automated without the need for any human intervention.


  • The digital Euro should be, to some extent, available for transactions outside the Eurozone. That needs always be balanced with the interest to avoid the pooling of excessive amounts of the digital Euro – in particular by market participants outside the Eurozone.


  • The digital Euro shall be state-of-the-art in terms of cyber security and system robustness. As for any crypto asset, any undue interference would be catastrophic for the reputation and the trust in the digital Euro.


Building on these established principles, there are a number of questions that still need to be answered. Among those, two stand out: (1) how private, confidential or anonymous shall payments with the digital Euro be and (2) what is the place of existing financial institutions in issuing, depositing or transferring digital Euros for their customers? Both questions are highly interconnected as the following three alternative ways of shaping the digital Euro show (taken from the ECB’s Report on a digital Euro):


  • One option would be that owners hold an account (or wallet) for their digital Euros with the ECB. This would mean that not only the issuance but also the handling of transactions with the digital Euro would ultimately take place within the ECB. In this model, merchant banks could exercise support functions for the ECB (such as KYC and similar) but the core activities of account management would rest with the ECB. Any such model would not only require a very significant investment in the ECB’s systems and infrastructure, it would make all transactions also highly visible to the ECB.


© European Central Bank, 2020

  • In  a second model, the ECB would issue the digital Euro but decentralize its handling to a high degree, putting it into the hands of the holders themselves. This would approximate the digital Euro further to stable coins. The functionality would be similar to that of other crypto assets. In theory that would allow the greatest privacy with regard to any payment made with the digital Euro. Still, it would leave the question about the role of the merchant banks. Also, it may be more difficult to pursue some of the policy objectives that the ECB has flagged out for the digital Euro, such as to avoid any undue hording. Also avoiding cases of illicit use would be more difficult to prevent.


© European Central Bank, 2020

  • There are also a number of intermediate solutions possible – for example that the ECB bestows the merchant banks with the complete function of depositing and handling of the digital Euro – with a higher or lesser degree of information flowing from the merchant banks back to the ECB. Quite obviously, any such intermediate model is closest to what we know today as “bank money” ie money held on banks’ accounts. The advantage would be to rely on a workable system and to use the same level of confidentiality as customers experience with their bank transactions today. Possible disadvantages would be the continuation of a system of intermediaries that may lead to certain inefficiencies and an accumulation of costs.


© European Central Bank, 2020

Next steps

The discussion of these and other system choices have now begun. We will follow them closely and keep you in the loop.

Authored by Leopold von Gerlach and John Salmon


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