The European Central Bank (ECB) is working on introducing the digital euro, a new type of currency designed to be as secure and accessible as cash.
The digital euro is a Central Bank Digital Currency (CBDC) designed to mirror the privacy, security, and accessibility of cash in the digital age. While it shares the general characteristics of CBDCs, such as being issued by a central bank and being risk-free, it has specific features tailored for the euro area:
- Eurozone Specificity: The digital euro is intended to operate only within the eurozone’s 20 member states that use the euro as their official currency.
- Complement to Cash: Unlike some CBDCs designed to replace cash entirely, the ECB emphasizes that the digital euro will complement, not replace, physical cash and existing payment systems.
But what makes this digital version of the euro so important? And how could it impact the way everyone handles money in the eurozone?
Why Do We Need a Digital Euro?
Over the past few years, especially after the COVID-19 pandemic, digital payments and online shopping have become more popular across Europe. In fact, cash use in payments dropped from 72% in 2019 to just 59% in 2022. For the first time, the number of banknotes in circulation has also declined.
In response to these changes, the ECB began studying the idea of a digital euro in 2021. This digital currency wouldn’t replace cash but would serve as an additional way to pay, especially in a world where digital transactions are becoming the norm.
The European Commission proposed legal guidelines for the digital euro in 2023. Now, it’s up to lawmakers to decide how and when it could become a reality.
What Is the Digital Euro?
The digital euro would be a form of money issued directly by the central bank. Unlike your regular bank deposits or cryptocurrencies, it would have no financial risks. Its purpose is to provide a secure and reliable form of public money for everyday use.
Think of it as an electronic version of cash. People could use it to pay for groceries, rent, or services through a mobile app or a physical card. Importantly, the ECB emphasizes that this new currency would work alongside cash, not replace it.
For now, the digital euro wouldn’t be a way to save money, as it wouldn’t earn interest. Instead, it’s designed for quick and simple transactions.
How Would It Work?
Using the digital euro would be straightforward. Individuals could set up a digital euro wallet through their bank, a post office, or other authorized providers. This wallet could be loaded with funds from a bank account or by depositing cash.
Once loaded, payments could be made instantly online or in physical stores, even without internet access in some cases. This offline option ensures that people in remote areas or those without reliable connectivity can still use the digital euro.
To make sure everyone can access it, the European Commission has suggested requiring banks and other institutions to provide free support for digital euro services. For those without bank accounts, public authorities could offer access to this currency.
What Problems Could It Solve?
Currently, Europe doesn’t have a unified digital payment system. When traveling across countries in the eurozone, many people find that their national debit cards don’t work abroad. Instead, they rely on international companies like Visa and Mastercard, which handle about 64% of electronic transactions in the euro area.
A digital euro could eliminate this dependency, offering a single payment method across the eurozone. It could also strengthen European control over financial data and ensure greater privacy for users.
When Could It Be Ready?
ECB President Christine Lagarde estimates that the digital euro could be available by 2027. However, this depends on how quickly lawmakers agree on the legal framework.
The ECB is already working on the technical aspects, with plans to finalize preparations by late 2025. After that, the decision to issue the digital euro will rest with the ECB’s governing bodies.
Final Thoughts
Central Bank Digital Currencies (CBDCs) like the proposed digital euro have the potential to redefine how money works in the modern economy. By providing a secure, government-backed alternative to private digital payment systems, a CBDC can enhance financial stability, promote inclusivity, and reduce reliance on international payment providers.
As the world moves toward a more digital future, CBDCs may play a critical role in shaping the next era of global finance, offering a blend of security, convenience, and accessibility for all.
