A digital euro: upcoming innovation with numerous implications for daily life

By Andrey Afanasiev

A digital euro will be one of the innovations that could change our daily life in the very near future. The purpose of the introduction of a digital euro is to provide Europeans with a new, simple, universally accepted, safe and trusted means of payment. A digital euro would be accessible to individuals and companies. It would not substitute the current euros, but the opposite as a digital euro would be an additional choice on how to pay.

A digital euro is a new electronic form of money in addition to banknotes (cash money) and bank account balances (non-cash money). The digital euro would still be a euro – the currency issued by the Eurosystem, i.e., the European Central Bank and national central banks. In other words, a digital euro would be a central bank liability offered to citizens and businesses in digital form for their retail payments. So, the digital euro is not a cryptocurrency.

Today it is too early to talk about a final design of a digital euro. The Eurosystem started a comprehensive assessment of the benefits and challenges of a digital euro in 2020. As of now, the project is in an analysis phase and for the digital euro model, there are several technical and organisational approaches under consideration.

The underlying infrastructure for the provision of a digital euro can either be centralised (end-users hold accounts, which allow users to deposit and withdraw digital euro), or decentralised (end-users are provided with a bearer digital euro). The access to digital euros could be ensured either by hardware or by software tools, or their combination.

The application of digital euros for payments could be illustrated by the following example. Let us imagine a person who has euro banknotes in his/her wallet. These physical paper-based euros could be digitalised and transferred from the wallet to a smartphone (or another electronic device) – a new “digital wallet”. After such digital transformation, payments can be performed by simply bringing together two smartphones, which result in correspondent movement of digital euros from one smartphone to another. To some extent, this is similar to the way we perform payments by using plastic cards. But a plastic card simply provides remote access to a bank account, meanwhile, digital euros could exist in a bearer form as well.

A digital euro is not to be the only representative of innovative digital money. The digital dollar in the US, digital yuan in China, and digital currencies in some other countries are going to appear as a result of their central banks’ efforts. The People’s Bank of China began work on the digital yuan in 2014. Due to the earlier start, China has already started digital yuan trials across major cities in China. During these pilot projects, the digital yuan in the form of lotteries is handed out to residents, who can spend the digital money at certain retailers. There are expectations that foreign visitors and athletes would be allowed to use the digital yuan at the Beijing Winter Olympics in 2022.

To provide an innovative product in line with customers’ expectations, the ECB has completed the public consultation on a digital euro and published a related report in April 2021. According to the ECB report, citizens participating in the consultation consistently opt for privacy, security, usability throughout the euro area, absence of additional costs, and usability offline. So, customers’ requirements have been expressed.

What are the next steps? The Eurosystem will consider whether to start a full-scale digital euro project towards mid-2021. One of the possible outcomes is the launch of an investigation phase aimed at developing a minimum viable product. The digital euro matter to be followed up!

Andrey Afanasiev is an Associate Professor of Finance and Risk Management, the Director of the MSc in Financial Services at CIIM – Cyprus International Institute of Management