4.7 Digital Euro

4.7 Digital euro

What is the digital euro?

A Central Bank Digital Currency (CBDC) is a digital form of a nation’s sovereign currency (fiat currency). It is the evolution of cash into the digitalised world.

Globally, some central banks have already launched a CBDC whilst a number of central banks are considering the potential introduction of a CBDC, and are at various stages of research and pilot projects. The motivations for introducing retail CBDCs are often influenced by global developments, however economic-specific conditions can play a factor. For countries with developed economies, the motivation for issuing a CBDC can stem from the declining use of cash and the need to provide an alternative electronic form of cash (or public money). While for countries with developing economies, motivations can include financial inclusion and the need to develop retail payments systems to better support economic development.

In a European context, the ECB’s motivation to explore the issuance of a CBDC, or digital euro, derives from wanting to ensure European citizens continue to have access to central bank money in a way that meets their needs in the digital age. A digital euro would complement existing banknotes and coins, ensuring a public option would always be available – in the form of both cash and digital euro. Widely available and accepted across the entire euro area, the digital euro would provide citizens with greater choice in how they pay for everyday goods and services extending to places cash cannot physically reach today, such as online commerce. Digital euro basic services would be free of charge while guaranteeing the highest level of privacy in digital payments. Uniquely, a digital euro would offer citizens the possibility to pay offline, providing cash-like privacy, with neither the payment service provider nor the central bank processing the payment.

A digital euro would strengthen Europe’s strategic autonomy and monetary sovereignty by boosting the efficiency of the European payments’ ecosystem as a whole, fostering innovation and increasing its resilience to potential cyberattacks or technical disruptions, such as power outages.

The ECB are considering launching a digital euro (a CBDC) in Europe to respond to the increasing demand for safe and trusted digital payments. Having digital money issued by the ECB would provide an anchor of stability for the payment and monetary systems. The European Commission would provide the legislative basis for a digital euro.

It is already clear that a digital euro should be accessible, robust, safe, efficient and compliant with the law. Ensuring that it would also have the highest level of privacy will be vital.

What preparation has been undertaken in order to prepare for the digital euro?

In June 2023, the European Commission presented a draft legislative proposal for a possible digital euro. The purpose of the legislation is to ensure that any future digital euro would give people and businesses an additional choice to pay digitally using a widely accepted, cheap, secure and resilient form of public money anywhere in the euro area.

The ECB’s Governing Council launched the two-year investigation phase in October 2021, to determine the feasibility of digital euro as a complement to cash. As part of the investigation phase, the ECB, in conjunction with national central banks, developed the high-level product design and the associated user requirements for a potential digital euro offering[1]. On 18 October 2023, the ECB announced that the investigation phase has been concluded and that the preparation phase would be commenced. This decision was taken after having determined that it would be possible to create a digital euro offering to meet citizen’s needs and preferences.

Following the publication of the results of the investigation phase it was concluded that there are a multitude of benefits from its establishment, including two critical ones of cost and offline capabilities. Firstly, digital euro basic services will be free to use, enabling individuals from all socio-economic backgrounds to benefit from the use of the digital euro. Secondly, the digital euro will be available both online and offline. The online mode allowing for payments where cash is not a feasible option such as during online transactions. The offline element of the digital euro would have cash-like features enabling payments without online connectivity, thus enhancing privacy to levels similar to cash. Offline payments would enhance peer to peer transactions creating the same experience as cash.

The move by the ECB’s Governing Council to the preparation phase is not a decision to issue a digital euro, but to further progress the work on necessary to prepare for development of a digital euro. Some of the key deliverables involved in the preparation phase include finalising a digital euro rulebook[2] and selecting providers that could develop a digital euro platform and infrastructure. It will also include testing and experimentation to develop a digital euro that meets user requirements and the Eurosystem’s expectations, in terms of user experience, privacy, financial inclusion and environmental footprint.

In parallel to the ECB’s project, the European Commission’s draft ‘Single Currency Package’ proposal provides the legal framework for a digital euro while also strengthening the role and acceptance of cash in society. The legislative proposal will ensure that the digital euro has its key characteristics as that of a public good. It is important to note that while the preparation phase will run in parallel with the legislative process, the decision to issue a digital euro will only be considered by the Governing Council at a later stage and this can only be done once the European Parliament and Council of the European Union have adopted the digital euro legal act.

Supporting the implementation activities of the digital euro in Ireland will be a key objective of the NPS.