The digital evolution has profoundly transformed our lives, affecting all sectors of society, including that of money. This sector is thus seeing the emergence of new concepts, in particular that of the digital euro, the future digital currency of the European Central Bank, which is at the heart of the debates. According to the institution, this currency will essentially be used to offer citizens a digital payment alternative on a European scale. But what will be the real interest for Europeans accustomed to coins, notes and cheques? This article explores the issue in depth by explaining what the digital euro is and detailing its various functions and implications.
The digital euro: definition of an innovative concept
The digital euro is a central bank digital currency or CBDC (Central Bank Digital Currency). It is an electronic version of the official currency of the euro economic zone, i.e. the euro issued by the European Central Bank (ECB). Its issuance, management, legal value and regulation are directly ensured by this financial institution.
The digital euro was concretely designed with a single objective. That of providing a safe and practical alternative to traditional forms of currency, while responding to technological developments and the changing needs of consumers and businesses.
As a result, this CBDC has the same value as euro banknotes and coins. It will be stored on electronic devices, such as digital wallets and payment cards. This operation will thus allow users of the digital euro to easily carry out fast, reliable and secure digital transactions without having to go through an intermediary.
The digital euro project is still being discussed and explored by the European Central Bank, alongside the work of the European Commission aimed at establishing the necessary legislative landscape at this CBDC. Several studies, experiments and consultations are underway to assess its potential benefits, challenges and implications.
The motivations behind the digital euro initiative
The emergence of the digital euro is motivated by several economic and technological reasons. In addition to the desire to meet the new needs of consumers and businesses, the other main motivation is to preserve the monetary sovereignty of the European Central Bank in the face of private currencies, such as cryptocurrencies and stablecoins.
From a general point of view, CBDCs are the response that governments have found to the meteoric rise of cryptocurrencies. These, inheriting the Bitcoin philosophy, are beyond the control of central banks and occupy an increasingly prominent place in the economic landscape. A response was therefore necessary. The digital euro is part of this approach.
Through the digital euro, the Bank also intends to offer an innovative solution to improve the efficiency of payments and transactions, reducing costs and speeding up the process. This currency could also encourage financial inclusion by allowing unbanked populations to access financial services more easily.
The modernization of the monetary system is also possible through the digital euro. The future CBDC of the euro zone could in particular allow the ECB to better control monetary policy and monitor monetary flows.
The potential benefits of a digital euro
Embracing the digital euro could bring many benefits. For example, this central bank digital currency would:
- Reduce the dependence of European citizens on commercial banks, and therefore improve the stability of the financial system: users could count on a safe and resilient public alternative to private money. Digital public money carries almost no risk, because central banks cannot go bankrupt;
- Force the banking system to be more responsible and competitive in terms of ethics: retail banks will have to adapt to new consumer habits and lower implicit public subsidies by offering better services;
- Improving the accessibility of the financial system: commercial banks are very selective with regard to their customers. Besides, the digital euro aims to be a more accessible payment system and therefore more practical to use.
Launch of the digital euro: where are we?
The launch of a secure and efficient digital euro takes time. This large-scale project is currently piloted by the Eurosystem, a body of the European Union, which brings together the European Central Bank and the national central banks of the Member States of the Union which have adopted the euro.
Since October 2021, the Eurosystem has launched an investigation phase lasting two years. This survey examines the technical and political options that could form the basis of a digital version of the euro. It also looks at possible distribution methods, use cases by citizens and businesses as well as the potential impact that the launch of this CBDC could have on the European economy and society.
In total, the Eurosystem has already published three investigation reports. These describe the progress of the research work and the results obtained so far:
- First progress report on the investigation phase of the digital euro ;
- Second progress report on the investigation phase of the digital euro;
- Third progress report on the investigation phase of the digital euro.
The investigation phase will end soon, in October 2023. The conclusions of the investigation and the next steps of the digital euro project will be presented at this time. The Eurosystem can then decide whether the European Union should continue the process of developing the CBDC for the euro zone. To this end, the body will carry out tests of design solutions in collaboration with stakeholders: this is the preparation phase.
It is important to underline that the preparation phase does not constitute the official launch of the digital euro. This step will only be used for testing. In the end, the decision whether or not to issue a digital euro will be made at the end of these tests.
Christine Lagarde, President of the ECB, estimated in 2022 that the implementation of the digital euro would take up to five years. Until this deadline has passed, discussions related to issues of payment confidentiality and protection of user privacy will better define the operation of the future CBDC. Europe’s monetary future is now being played out.
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