In this article, we explain the core benefits of the digital euro. We argue that the digital euro can have benefits — if designed adequately. With the envisioned implementation of the ECB’s digital euro, we hope that concerns around privacy, civil rights and the stability of the financial sector will be considered. We find this to be of utmost importance since the digital euro will be available for hundreds of millions of European citizens — and will lay the foundation for the future of payments in the euro area. As other major currencies around the world are also “upgraded” with regard to their payment infrastructures, Europe cannot wait with its own central bank digital currency (CBDC). But it has to do it right.
We further argue that the ECB’s digital euro is only one side of the coin. The other side are euro-denominated stablecoins. US dollar stablecoins already exist — with double-digit billion trading volume per day. However, sizable and heavily-used euro stablecoins do not exist today leading to a euro market share of close to zero, while the US dollar has a market share of approximately 95%. The euro and Europe will get in trouble when ignoring stablecoins as a payment technology. — Authors: Philipp Sandner, Jonas Gross
The payment landscape is changing. For a long time, we primarily used banknotes issued by central banks as means of payment. In the digital age, many new payment methods have occurred: bank transfers, credit cards, and mobile smartphone payments, such as Apple Pay or Google Pay, amongst others. These new payment methods rely on money that is issued by private sector financial entities, including banks. Payment companies, such as Visa, Mastercard, or PayPal, use this commercial bank money to conduct and settle payments between users. The central bank is currently losing its importance for millions of citizens since these digital payment methods — based on commercial bank money — are used more often as time is passing. Physical cash (that is, banknotes) — as central bank money — is used less and less. The Covid 19 pandemic with its restrictions of physical touch points accelerated this development.
To encounter this, central banks are exploring the issuance of their own digital currencies, central bank money for retail payments (that is, retail central bank digital currency, CBDC). We can think about these currencies as “digital cash”. In Europe, the discussion is pivoting around the “digital euro”. With the digital euro, the ECB could issue its own means of payment that can increase the role of the central bank around payments, so that the ECB might not be “forced” to be in the background — behind private-sector companies such as PayPal, Visa, or Mastercard that dominate the payments market. Rather, the ECB seeks to become a relevant player in the payment market by providing “digital cash” to hundreds of millions of European citizens. This is a reasonable goal. But questions like the following inevitably occur: Does the ECB choose the right approach in terms of CBDC design? Do we actually need the digital euro by the ECB at all? What are the chances and risks for European citizens? What is the relation to euro stablecoins and could euro stablecoins also help, especially because they could be launched several years earlier than the ECB solution?
What is the digital euro?
Let us first take a look into what the digital euro actually is. The digital euro is a buzzword. “Digital euro” generally means that the euro is transacted digitally. No more, nor less. But digital transactions can happen in multiple ways. The ECB’s digital euro is only one side of the coin: It is a CBDC. It means that the ECB is issuing the money. It is, thus, central bank money; holders of this money own a claim towards the central bank. In general, the euro can be provided to all kinds of actors: banks, companies, and end-users/citizens, to keep it simple. While the ECB currently drafts a concept for the digital euro but has not yet decided to actually launch it, we can already see the silhouettes of its digital euro: It primarily targets citizens and can thus be classified as a retail CBDC. We can expect that such a payment system will be launched in 2026 at the earliest; it will take some more years to build this infrastructure and to introduce required regulatory changes Alternatively, the ECB could have chosen to deliver the euro primarily to commercial banks (on blockchain rails). This would have been called wholesale CBDC.
If proceeding with launching a digital euro, the ECB seeks to deliver the euro to hundreds of millions of citizens and make it available in all euro countries equally. There are multiple ways of doing this: The direct model would be, illustratively speaking from an end-user perspective, that the ECB provides and maintains a smartphone app, allowing citizens to use this app for incoming and outgoing payments. It would then be in charge of all administrative processes similarly to a local bank. It is difficult, or basically impossible, to imagine that the ECB itself acts as an app-developing entity and takes care of all the administrative burdens (including onboarding/KYC processes) that come with it. The ECB is a public institution whose aim is to do policies for hundreds of millions of citizens and to ensure price stability. We can expect that the ECB will — via a private/public partnership — seek support from the private sector. This could be in a similar form as the cash system works today: While the ECB issues the money and distributes banknotes to banks, banks take care of the end-user contact and all the administrative tasks related to (digital) cash.
Therefore, from all that we know by now, the ECB seeks to provide a novel payment method but wants existing banks to take over administrative tasks around the digital euro. This includes, amongst others, creation of wallets/accounts, funding of accounts, know-your-customer (KYC) processes, anti-money laundering checks etc. Please note that the ECB will decide later in 2023 whether to proceed with developing a digital euro.
Yet, illustratively speaking, this could be implemented as follows: Imagine your standard online banking app from your local bank indicates that you have 3,000 euros in your bank account. After the launch of the ECB’s digital euro, this online banking app could have a second “row”, called “digital euro”. At the outset, it would say “0 euro balance”. But you could move — e.g. by swiping from top to bottom — 1,000 euros from your traditional bank account to the ECB’s digital euro account. In the background, money would be transferred from the commercial bank operating the online banking app to the ECB and its payment servers. Currently, it seems that the amount of euro citizens can hold on the ECB’s digital euro account will be limited. Note that the ECB will not provide any loans to end-users. Frequently, the ECB mentions a potential limit on the digital euro account around 3,000 euros, even if it is also stated that this number should not be overinterpreted for now. As a point of reference, the Bank of England is mentioning between 10,000 and 20,000 British pounds (as of today, between 13,000 and 26,000 euros). If the limit is exceeded, we can expect that funds from the conventional bank account are used (waterfall principle). It is important to understand the payment details in the background: In- and outgoing money on your traditional bank account would be handled by your traditional (online) bank. Yet, in- and outgoing money on your ECB’s digital euro account — even though visible by your online banking app — would be handled (and settled) by the ECB (with support of traditional banks around administrative tasks).
So far, we have framed the digital euro as a form of money provided by the ECB. This is only half of the truth. The digital euro is a generic description and can be implemented in many ways. One way is the ECB’s CBDC, another way are euro stablecoins. The Markets in Crypto Assets Regulation (MiCAR) — drafted by the European Commission and entering into force in 2024 — will also regulate euro stablecoins. According to this regulation, stablecoins can be divided into e-money tokens and asset-referenced tokens. E-money tokens would always be fully backed by euro deposits and thus represent the value of a euro, subject to strict rules. First companies have started to provide the digital euro as stablecoins.
It is important to highlight this alternative besides the ECB’s CBDC. The digital euro could be supplied to us as citizens via two routes: the ECB with its digital euro “row” in our favorite online banking app, and companies delivering the digital euro in the form of euro stablecoins. The advantage of the latter? Among the key advantages are that the stablecoin variant can be used across borders around the world. In Lebanon, we recently saw how powerful the application of stablecoins is. In this case, it has been the US dollar but regulated as a blockchain-based stablecoin. Further, the use of blockchain technology as the technological basis also allows for promising novel use cases, e.g., around payment streaming in the industry: In theory, a euro stablecoin could be used by industrial companies to automate payments between machines for a fraction of costs compared to today’s payment routes.
Do we need the ECB’s digital euro?
The key question is whether a CBDC issued by the ECB is indeed needed. Recall that, simply put, the ECB will develop a digital euro that would be visible in today’s online banking apps. With this digital euro, we could move money from our traditional bank account into the ECB wallet. We could also use this ECB wallet for payments.
But, wait, if we could use the ECB’s digital euro for payments, what is the benefit over and above today’s existing means of payment? What is the benefit over credit cards? What is the benefit over Apple Pay or Google Pay solutions? Actually, it remains unclear.
If we today purchase goods at the supermarket or a coffee in a café, we can use cash, a banking card, a credit card or — in a very convenient way — Apple Pay or Google Pay via the smartphone. All payment methods work very well. Let us illustrate this via the example of Apple Pay: The cashier presents an invoice of EUR 2.50, you hit the iPhone button twice, authorization is granted with face recognition and the amount is being paid. Currently, there is, from a convenience perspective, no way to optimize this process. It is nicely designed and hard to improve. Privacy-seeking citizens always have the option of using physical cash for payments.
The ECB with its current digital euro plans envisions providing the digital euro to millions of citizens through their existing banking relationships and networks. With its current plans, the ECB would launch these services not before 2026. Most probably, given the size of the infrastructural changes, the launch date could also be 2028. So, to be crystal clear, the ECB plans to launch a novel payment infrastructure — something like a “credit card 2.0” — by 2026 (at the earliest).
But do we need a credit card 2.0? No, not necessarily. And definitely “no” in case the launch date is as late as 2026 (or 2028). Today, in 2023, we have well-functioning online payment methods thanks to PayPal, Visa, Mastercard, Apple, and Google and it … just works very fine. Currently, it is hard to envision what a digital euro issued in 2026 or beyond by the ECB could do better than private sector solutions. This puts the focus of the current ECB plans in doubt.
The “digital euro” has benefits
Yes, the “digital euro” can have benefits. For example, as outlined above: If the digital euro is implemented in a stablecoin format, it has clear benefits for cross-border payments. Imagine, in Libanon, where the current banking system is imploding, the population would not just have access to US dollar stablecoins but also to euro stablecoins. As cross-border payments seem to have low priority for the initial version of an ECB-issued digital euro, this benefit is not a focus of the CBDC variant issued by the ECB. Also, for efficiency in capital markets and the industry, a token-based stablecoin would yield several benefits: the delivery vs. payment process would become much more efficient since clearinghouses could be replaced by smart contracts. This has also been found by the ECB. But it applies only to stablecoins (on blockchain systems), and it currently seems very unlikely that a CBDC will be issued on a blockchain. By the way, could the ECB’s digital euro be used in the industrial context? Some experts argue so. We don’t think so due to the limit, which could lie around 3,000 euros. There are not many B2B applications, industrial processes and corporations where this threshold of 3,000 euros would not be way too low.
But for the current specification of the ECB’s digital euro and with the current public information available, no clear benefits can be seen on behalf of the users. There are benefits on a geopolitical level: With the ECB’s digital euro plans, Europe would get a sovereign payment infrastructure, a payment infrastructure in the hands of the Eurosystem. Such a payment infrastructure would lower the dependence on foreign entities that could restrict access for European entities, e.g., in the case of sanctions. Thus, a CBDC could make Europe more autonomous. These arguments from a European sovereignty perspective are very valid and can be understood, but they are not relevant to the day-to-day user. This can clearly be seen by the payment behavior that, on average, citizens do not like that payments are conducted via non-Europe payment rails, e.g., in the case of a credit card, PayPal payments or Apple Pay. Still, they use these payment rails to pay. Day by day. Dozens of millions of people. It is not a dealbreaker. So, we assume that it will be very challenging for the ECB to convince European citizens to use its digital euro solution — if proceeding with the current design focus.
The digital euro should protect privacy of citizens
We truly believe that the digital euro by the ECB could have benefits, if designed adequately. But the current specification of the ECB has significant limitations. For example, the Digital Euro Association outlined in the “CBDC Manifesto” the need for a very high degree of privacy, similar to the privacy of cash today: “A CBDC should provide the highest degree of privacy. In this context, a CBDC should supply technically guaranteed privacy by design and by default, without the need to trust the central bank to preserve privacy.” While the ECB generally follows these arguments and puts privacy in the foreground, it follows a different approach that provides substantially less privacy to citizens. The ECB states: “In a baseline scenario, compatible with the current regulatory framework, a digital euro would provide a level of privacy equal to that of current private sector digital solutions.” Thus, the digital euro would have a degree of privacy similar to existing digital payments and not cash payments. Having cash-like privacy could make a CBDC more attractive, because, to date, there are no digital payment methods available that provide high privacy. Confidential payment data are always shared with third parties and is not always kept private. The ECB quote implies that the envisioned privacy is neither “technically guaranteed by design or by default” nor “without the need to trust the central bank”. Additionally, there are further questions around privacy, e.g., how could privacy be changed in new revisions of the software code of the ECB’s CBDC? How are data recorded kept separate from the bodies orchestrating the network? How is it secured on a governance level that changes on the privacy level cannot be made easily?
The digital euro should guarantee civil rights of citizens
Also, as we have set out in the CBDC Manifesto, “a CBDC should not be designed in a way to do harm to society, e.g., via very negative interest rates, or via so-called programmable money that restricts the use of money for specific types of expenditures (e.g., special food and beverages, computer games etc.) or that expires after a certain amount of time. A CBDC should be based on principles of self-determination and freedom.” This is what the ECB plans to do — at least for the start. Yet, it remains unclear what the ECB will do in the future. We currently observe that in China for its CBDC, programmable money applications are tested. Who can guarantee that this principle is also fulfilled in the future? Maybe, European societies also have to ensure that the ECB cannot opt out from these principles. And yes, there are also technical possibilities available today — “privacy by design” — that would help to ensure that the ECB (and other central banks) indeed follow the path that they started to pursue.
The digital euro should not disrupt the existing banking system
Today, banks are an essential pillar of the economy. Banks provide loans to customers and corporations that seek liquidity and are willing to pay an interest rate in return. To achieve this, banks rely on bank deposits. Based on their customers’ deposits (or purchased assets), loans can be provided. So, if citizens could withdraw most of their deposits from banks, banks might be hampered in providing loans to those persons or corporations needing loans. This could result either from liquidity shortages stemming from the (sudden) conversion of a substantial amount of bank deposits into CBDC or higher refinancing costs of banks needing to find other sources of refinancing than bank deposits.
The ECB plans to implement thresholds on maximum account balances (see above) for which the ECB’s digital euro can be used. As soon as citizens want to place more money in the digital euro “vault”, the amount would overflow to existing bank accounts. This is how we expect the system to work. But it all comes down to the threshold in place. How large will it be? And will it be adjusted over time? According to announcements by the ECB, the threshold could lie between 3,000 and 4,000 euros. However, no final decision has been taken yet. But what would happen if there is no threshold in place? Or if the threshold would be very large, e.g., 500,000 euros? Then, in fact, a substantial amount of deposits could be moved away from the banks towards the ECB’s CBDC. Just recently, the German Association of Banks has warned of such a scenario if the limits are rather high. In times of financial crises, this could become a challenge for the financial sector if suddenly, due to lower trust in the stability of the banking system, money is converted from the conventional bank account to the CBDC account. But currently, the consequences for the financial sector of such high thresholds have not been analyzed properly. This size of the threshold and the modus operandi how this threshold can be changed (i.e., the governance) are therefore crucial. The implications of such changes in the governance of the system need to be studied much more intensely. While such a threshold can mitigate negative effects for banks, it also means that use of the digital euro is restricted. If a 3,000–4,000 limit is in place and you would like to buy a car with a digital euro, you cannot use the digital euro for it. This could ultimately lead to a lower market share and lower adoption of the CBDC. Hence, there is a tradeoff around the use of limits to prevent outflows from the financial sector and reaching a high market share.
In general, the digital euro — as is the case with digital money in general — is desired as many benefits can be envisioned. There are substantial benefits for having digital cash as long as key principles of privacy and freedom rights are not affected. Given this, the digital euro is generally desired — be it in the form of the ECB’s digital euro or in the form of euro-denominated stablecoins. These topics need more investigation, also because the market share of US dollar-denominated stablecoins yields more than 95%. In other words, other currencies besides the US dollar do not play a significant role today with regards to stablecoins.
Concerning the ECB, more research is needed to analyze the role of privacy, civil rights, and the impact on the existing banking system when the ECB’s digital euro would launch — most probably in 2026 or in the years thereafter. Up until this point in time, European societies, bodies in politics, and associations should increase their efforts to understand the “digital euro” — implemented by central banks or stablecoin operators — to scrutinize the implications for the current financial system and for every European citizen. This is also one of the key missions of the Digital Euro Association.
About the authors
Prof. Dr. Philipp Sandner has founded the Frankfurt School Blockchain Center (FSBC). From 2018 to 2021, he was ranked among the “top 30” economists by the Frankfurter Allgemeine Zeitung (FAZ), a major newspaper in Germany. He has been a member of the FinTech Council and the Digital Finance Forum of the Federal Ministry of Finance in Germany. He is also on the Board of Directors of FiveT Fintech Fund and Blockchain Founders Group — companies active in the field of blockchain startups. The expertise of Prof. Sandner includes crypto assets such as Bitcoin and Ethereum, decentralized finance (DeFi), the digital euro, tokenization of assets, and digital identity. You can contact him via mail (email@example.com) via LinkedIn or follow him on Twitter (@philippsandner).
Dr. Jonas Gross is Chairman of the Digital Euro Association (DEA) and Chief Operating Officer at etonec. Jonas holds a PhD in economics from the University of Bayreuth, Germany. His main fields of interest are central bank digital currencies, stablecoins, cryptocurrencies, and monetary policy. Further, Jonas is co-host of the German podcast “Bitcoin, Fiat, & Rock’n’ Roll”, external lecturer at the Frankfurt School of Finance and Management, and member of the expert panel of the European Blockchain Observatory and Forum.