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Digital euro – a new chapter for retail payments?

The ECB announced in July 2021 that it will officially launch a digital euro project with a 24-month investigation phase covering key questions regarding design and distribution. In taking this step, the ECB is reacting to the emerging payment needs of a modern economy and the growing trend of central bank digital currencies in other parts of the globe. Introducing a Central Bank Digital Currency (CBDC) can also be seen as the response of the monetary authorities to the rise of crypto-assets, notably stablecoins.


Digital Euro in a nutshell

A digital euro is an electronic form of official money issued by the ECB that would be made widely accessible to citizens and businesses to conduct payments. It does not replace cash but rather complements it – essentially like banknotes but in a digital format.

Reasons to issue a digital euro

The ECB has identified a number of scenarios in which the Eurosystem could be induced to issue a digital euro to help achieve its objectives:

  • The digital euro could strengthen the digitalisation and independence of the European economy. It could reduce costs for payment service providers by making their business proceedings more efficient and preserve EU autonomy in the retail payment sector.
  • The trend towards a decline in the use of cash as a means of payment, exacerbated by the COVID-19 crisis, may lead to excessive dependence and focus on private forms of money and payment solutions. Issuance of a digital euro could help ensure the sustainability of the cash infrastructure by providing an additional form of public money.
  • Should foreign CBDCs or private digital payments become widely used in the Eurozone, European financial, economic and political sovereignty could be endangered. Issuing a digital euro could help preserve this EU sovereignty.
  • Although to be further explored the issuance of a digital euro could be beneficial from a monetary policy perspective since it could be used as a new transmission channel.
  • A digital euro could constitute a possible contingency mechanism in case that the provision of payment services is hindered by extreme events like cyber-attacks, a pandemic or other extreme events.
  • As a Eurosystem objective, a digital euro could be a possible means to strengthen the international role of the euro and to improve cross-currency payments by stimulating demand for the euro among foreign investors.
  • A digital euro may help to support improvements in the overall costs and ecological footprint of the monetary and payment systems. In this context, the ECB would have a catalyst role by putting pressure on providers of payment services.

The introduction of a digital euro takes place in a global movement to CBDCs for which the Bank for International Settlements and the G7 have recently issued common foundational principles, including energy efficiency so as to support the transition to a zero-carbon economy. 

Digital euro = cryptocurrency?

The envisaged digital euro is fundamentally distinct from a crypto currency. The digital euro would be backed by the ECB in the same way as bank notes and be a risk-free form of central bank money. This means that the ECB is accountable for ensuring an unchanged value of its instruments and for issuing instruments with a consistent purchasing power (its price stability mandate).

These features differentiate the digital euro from crypto-assets that have highly volatile prices making them unsuitable as a general means of payment and restrict their use to a limited set of investors. The digital euro should rather be seen as the digitalisation of banknotes and coins – comparable with a digital wallet.

Initiating a two year investigation phase

In the report on the digital euro published in October 2020, the ECB examined the framework conditions for a digital euro. Any type of digital euro has to comply with the Eurosystem’s mandate, policies and principles and fulfil a number of requirements – including robustness, accessibility, safety, efficiency and compliance with relevant legislation. The report explores potential effects of a digital euro, high-level legal considerations as well as design possibilities and technical and organisational approaches.

As the report does not suggest a specific type of digital euro nor does it reach firm conclusions on issues such as the set-up or distribution, the ECB  has now kick-started a digital euro project that will scrutinise these questions in more detail during an investigation phase that started in October 2021 and that is set to last for two years.


Importantly, starting the investigation phase does not mean that a digital euro will necessarily be issued but, rather, that the ECB will make a decision after two years. It will take some years thereafter until the digital euro will arrive in citizens’ (digital) wallets should the ECB decide to issue a CBDC.  The introduction of a digital euro may also require changes in legislation, although the power to issue banknotes is generally considered to also mandate the ECB to issue a CBDC.

The investigation phase will primarily be focused on developing a functional design and a technical infrastructure for the digital euro and will further assess the market impact since these issues have been not been finally determined in the report.

Design and infrastructure

The report has identified only high-level requirements regarding design features and underlying technology. In particular, no decision has been reached on the access model and on whether to use a centralised or decentralised infrastructure. The choice between these options has important consequences for the involvement of commercial banks in the distribution of a European CBDC. The ECB is also looking into hybrid models.

Potential market impact of a digital euro

The potential market impact of the digital euro has been addressed in the report but will be a central point of tension during the investigation phase.

Key issues to be contended with include:

Banks’ role as intermediaries

Currently banks act as intermediaries between the Eurosystem and the end user and the practice of interacting only with supervised intermediaries could continue in a digital euro world.

The ECB has not yet decided on the infrastructure supporting the digital euro and a decentralised model - by which end users could transfer digital euro directly among each other - could obviate the need for intermediaries and threaten banks’ business models.

Withdrawal of bank deposits

Introduction of the digital euro may need to involve allowing citizens to hold accounts directly with the central bank. This could lead to a withdrawal of deposits from the commercial banking system, particularly in a crisis when depositors might seek to transform their savings into digital currency, better protected at the central bank.

To combat this fear the ECB has - according to news reports -  already indicated plans to introduce a cap of EUR 3,000 for digital euro deposits.


For consumers the greatest concern as regards the digital euro is the erosion of their privacy and this will be a central issue regarding the take-up of a digital euro. A critical challenge will therefore be to strike a balance between protection of citizens' privacy while at the same time ensuring robust anti-money laundering and anti-tax evasion frameworks.

Further Reading

See the ECB website for more information here.

See the G7 Public Policy Principles for Retail Central Bank Digital Currencies here.

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