POSSIBLE IMPLICATIONS OF THE DIGITAL EURO ADOPTION

POSSIBLE IMPLICATIONS OF THE DIGITAL EURO ADOPTION

Iulia Monica Oehler-Şincai

The European Central Bank (ECB) launched in October 2021 a two-year investigation into the appropriateness of adopting the digital Euro for retail payments. After four Progress reports on the investigation phase of the digital Euro, the Governing Council (the main decision-making body of the ECB) decided to move to the stage of preparation for the adoption of the digital Euro in the Eurozone. This phase runs from November 2023 over two years, during which the Eurosystem focuses on further tests and experiments, continuing to consult with all stakeholders, including the general public, merchants, payment service providers (PSPs), and public authorities.

The European Commission adopted a legislative package on the digital Euro on June 28, 2023, which includes a proposal to establish a legal framework for a possible digital Euro. In the proposal for a Regulation of the European Parliament and of the Council on the establishment of the digital Euro, it is underscored that “banknotes and coins – which are the only current forms of central bank money with legal tender available to the general public (including people, public authorities and businesses) – alone cannot support the EU’s economy in the digital age. Their use in payments therefore diminishes as online purchases increase and payment habits of the general public shift towards the large variety of private digital means of payment offered in the EU. This puts at stake the desirable balance between central bank money and private digital means of payment. This trend could even be reinforced in the future, with the emergence of third-country central bank digital currencies (CBDC) and stablecoins issued by private firms, which could challenge the role of the euro in payments, in the EU and outside”. It is also underlined that the digital Euro would facilitate the development of pan-European and interoperable retail payment solutions, including “the full roll-out of instant payments”.

In the Opinion of the ECB of 31 October 2023 on the digital Euro, it is emphasized that the digital Euro “will be introduced first to persons established or residing in the euro area before being gradually rolled out to others. This initial introduction of the digital euro, and its related usage, creates a basis for the digital euro to be subsequently used by persons established or residing outside the euro area”.

In the first instance in the Euro area, the digital Euro would be an electronic form of cash, i.e. money issued by the ECB in digital form as a new form of the CBDC for retail payments. The preparation phase allows the ECB to test the available technologies (including the distributed ledger technology and its most successful form, namely the blockchain technology), behaviour of the market actors, and potential risks which accompany expected benefits.

ECB experts appreciate that the digital Euro must meet the highest standards of quality, security, and usability. The next steps will be determined depending on the results of the current preparation stage, which will end in October 2025, but also on the evolution of the legislative framework necessary for the adoption of the digital Euro. Given that the legislative process includes also the transposition of legislative changes into national legislation, it will be long-lasting, which determines that, in the eventuality of the ECB Governing Council’s decision to adopt the digital Euro currency, a partial launch of it in 2027 would be very ambitious, according to the literature[1].

Investigating the opportunity and preparing for possible digital Euro adoption in the near or distant future is taking place at a turning point in international payments. On the one hand, non-bank actors have continuously increased their role in global payments, the payment systems of large technology companies are considered to be accompanied by risks to financial stability, the migration from traditional means of payment (bank cards) to digital wallets is in full swing, and the risks associated with cryptocurrencies are increasingly evident (from high volatility to illicit transactions and the energy-intensive nature of the “mining” of some cryptocurrencies). On the other hand, card and mobile payments in the EU are dominated by non-European PSPs. To strengthen the open strategic autonomy of the EU, there is high time for a public initiative to diminish the extremely high dependence on external PSPs. A digital Euro would complement the private initiative already launched in several EU countries, namely the European Payments Initiative (EPI) based on a digital wallet, with the motto, “built for Europe, by European players”.

Opinions on the digital Euro range from the absolute necessity of its adoption to its uselessness and even unwanted effects on the credibility and reputation of the ECB if the digital Euro fails to be accepted and used on a large scale. In this context, it is worth recalling the Ecuadorian experience with Dinero Electrónico, functional between 2014 and 2018, which failed to reach the necessary critical mass both due to the lack of interest of the population (the existing alternatives being attractive and advantageous) and due to the fear of the private banks that a public digital currency would pose a threat to their activities. The lesson learned is that a CBDC adoption can only be successful if two cumulative conditions are met: (1) it is intensively publicized, explained, and understood, and (2) it is supported by all economic actors, including consumers, producers, exporters, importers, local traders, public institutions, and PSPs.

According to the ECB, the key arguments in favour of the digital Euro adoption, available through a digital euro wallet are related to: (1) the need to adapt to the digital age, imposed by the acceleration of the digitization in international payments due to the technological progress and an evident change in the payment behaviour of consumers which began even before the Covid-19 pandemic; (2) its attractiveness for the general public and companies as a digital means of payment that is free of any risk (in contrast to cryptocurrencies), that is “cheap, efficient, available everywhere” and, at the same time, that protects users’ privacy; (3) its capacity to reduce the over-reliance on PSPs outside the EU, given that there is a sufficiently large number of European providers ready to develop solutions for the digital Euro, which would strengthen the resilience of the European payment system; (4) the need to strengthen the monetary anchor[2] by maintaining public access to central bank money in an increasingly digitized economy, where the use of cash as a means of payment is declining. This objective supports financial stability and control over the implementation of monetary policy, associated with the ECB’s main objective of maintaining price stability. Other objectives, such as ensuring the strategic autonomy of the EU, deterring the illicit use of money, facilitating cross-border payments, and stimulating financial inclusion are also mentioned in the literature.

At the same time, however, the digital Euro adoption is also accompanied by risks, such as reputational risk for the ECB in case of a limited adoption; risks related to the specific technical solutions; potential costs to PSPs and end users; additional costs for monetary authorities; possible banking disintermediation, with negative effects in terms of credit allocation and financial stability; a lower level of privacy than expected by the population and the private sector, as it should be prevented also money laundering and terrorist financing.

The following Table reflects several pros and cons of the digital Euro adoption.

Table 1: Arguments for and against the digital Euro adoption

Sources: Table elaborated by the author, based on the literature reviewed.

There are scholars who underline that a holistic cost-benefit analysis would ensure that the launch of the digital Euro does not lead to an unsustainable situation, with high operational costs and new infrastructure investments that outweigh the benefits[3]. Such an analysis should examine not only the costs and impact for banks/intermediaries but also for merchants (through the costs of accepting an additional payment method) and the ECB (staff, infrastructure, and services provided free of charge). The decision to issue digital Euros in the Eurozone (either retail or wholesale) cannot be taken in isolation from CBDC developments in other major jurisdictions, as it would have a significant impact on the attractiveness of the common currency as a means of payment relative to other major currencies, but also as a global reserve currency. Therefore, a high degree of collaboration and coordination is required between the main currency areas (the USA, the UK, etc.). This is precisely why interoperability between the digital Euro and other major CBDCs should be taken into account.

The President of the Central Bank of Germany, Joachim Nagel, points out that the digital Euro adoption reflects the necessary adaptation to change imposed by technical progress[4]. It represents a natural response to the changes in payment behaviour, given the decrease in the use of cash and the sharp increase in the share of card payments in the Eurozone. Moreover, in the context of geopolitical tensions, the digital Euro adoption would exclusively involve the European infrastructure, without resorting to companies outside the EU therefore it would strengthen the European strategic autonomy and increase the resilience. Potential technical obstacles can be overcome through the joint efforts of central and commercial banks, experts in the field of information and communication technology and payments, and merchants. The digital Euro is seen as a unified payment solution to reduce the EU’s dependence on foreign PSPs, which dominate the market.

So far, four basic principles of the legislative framework for the digital Euro adoption have been outlined: (1) The use of the digital Euro by the general public must be free, as it is a European public good. (2) Intermediaries must be compensated for the services they provide, similar to other digital payments. (3) Overcharging of merchants by intermediaries (payment service providers) must be avoided. (4) The Eurosystem bears its costs, similar to how it currently bears its costs for cash.

In general, the population and representatives of the business environment are cautious about the digital Euro. In most opinion polls, more than half of respondents had never heard of a CBDC until the survey, so awareness of this new means of payment is low. There is still a high percentage of respondents who fear that cash will disappear, or believe that the digital Euro is a form of cryptocurrency, or that the digital Euro will be designed to strictly monitor payment flows, with the possibility of penalizing users by the authorities if certain conduct is not observed. Given that the success of a CBDC depends on its widespread acceptance and use, there is a need for the general public and the private sector to understand the need for the digital Euro adoption, therefore the persuasive power of the ECB is essential.

According to available surveys, the general public, the tech-savvy, and merchants are satisfied with the options they currently use and see no need for a new payment method. According to the respondents, in the eventuality of adopting the digital Euro, this new form of public money should be based on a European infrastructure, to function independently of global political events or decisions. In general, low costs, safety, and security are key priorities for a digital wallet, which should be more secure than current payment options. Regarding the digital Euro currency, awareness of it is low and it is not clear why the digital Euro is different from the digitally transferred Euro through the banking system. Therefore, no benefit is evident compared to the current system.

The expectations of the population and companies regarding the digital Euro are high. Among them are requirements related to confidentiality, security, use throughout the Eurozone, absence of additional costs, the possibility of offline use, and accessibility (including from the perspective of Internet connection). Regarding cross-border payments, the population considers the speed, cost, and transparency of exchange rates to be important. For the digital Euro to be a European public good, as declared by the public authorities, it is necessary to meet the cumulative conditions related to: security, confidentiality, acceptance, accessibility, wide circulation, ease of use, support of the central bank’s objectives of maintaining of monetary and financial stability, stimulating competition, efficiency, and innovation in the field of payments.

Considering the arguments against the CBDC adoption and the reputational risk for the ECB, as well as the need to finalize a detailed legal framework following the public debate and taking into account the requirements of all interested parties, we appreciate that the process of adopting the digital Euro will be long-lasting. The digital Euro adoption is, in essence, a political decision, but influenced by the activity of other central banks, as well as the attitude of the general public and private sector actors towards the digital Euro. In this context, it is worth mentioning the experience of a country outside the Eurozone, but within the EU, namely Sweden, which is among the most advanced worldwide in terms of its pilot project for the adoption of a CBDC. In September 2017, the Swedish Central Bank, the Riksbank, launched a project to investigate the need for a CBDC, the e-krona, and the possible consequences associated with it. Six Reports have been published to date. Similar to the Eurozone experience, the Riksbank’s initiative was motivated by the decline in the use of cash and the need for a secure and efficient digital payment system. During 2020-2023 it was developed a technical pilot project, together with the company Accenture, to create a possible technical platform for the e-krona. It is important to note the strong cooperation between the public and private sectors on the road towards the CBDC adoption, including for the currencies already adopted, namely the eNaira in Nigeria, Sand Dollar in the Bahamas, and Jam-Dex in Jamaica. At present the fourth phase of the pilot project underway in Sweden continues, even though in 2023 a study developed at the initiative of the government concluded that Sweden does not need a CBDC, as the population’s needs in this sense are insufficient.

The Bank for International Settlements’ most recent opinion poll on 86 central banks indicates that the probability that central banks will issue a CBDC in the next six years is currently higher for wholesale CBDC than for retail CBDC[5]. Taking into account that also in the Eurozone there are concerns about cross-border payments in terms of high costs, slow speed, limited access, and insufficient transparency, perhaps the adoption of the wholesale digital Euro would be more useful at present than the adoption of the retail digital Euro. At least in the first stage, a limitation on the holding of digital Euros is being considered, to limit the use of this new form of currency as a store of value. However, this would jeopardize the digital Euro use on a large scale. There are already studies underlining that the digital Euro must function as close as possible to the way banknotes work, so the limitation of its holding to EUR 3,000-4,000 per person and the limited confidentiality, even if imposed by concerns about money laundering and terrorist financing, must be re-evaluated.

For the digital Euro’s success, its large-scale use is a prerequisite. It is advisable to continue preparations for a possible digital Euro adoption and also to observe the evolution of the EPI project. At the same time, it is important to make the public and private sector aware of the benefits and risks of the digital Euro and find technical solutions for the possible problems. To be sure, the debate on the digital Euro will continue, the preparation for its adoption is a long-term process, and it is unlikely that this new form of fiat money as a retail CBDC will be widely adopted in the Eurozone in the current decade.

[1] Grünewald, S. (2023). A legal framework for the digital euro An assessment of the ECB’s first three progress reports, Economic Governance and EMU Scrutiny Unit (EGOV) Directorate-General for Internal Policies, European Parliament, May.

[2] At present, the financial anchor is given by cash.

[3] Thomadakis, A., Lannoo, K. & Shamsfakhr, F. (2023). A digital euro beyond impulse – think twice, act once, CEPS-ECMI-ECRI Study, Centre for European Policy Studies, Brussels.

[4] Nagel, J. (2024). The digital euro – unifying and trustworthy, Text of the Vigoni lecture by the President of the Deutsche Bundesbank, Rome, 24 June.

[5] Di Iorio, A., Kosse, A. & Mattei, I. (2024). Embracing diversity, advancing together – results of the 2023 BIS survey on central bank digital currencies and crypto, BIS Papers No 147, Monetary and Economic Department, June.