What is the digital euro?

The digital euro is a proposed digital version of the euro by the European Central Bank (ECB). It would essentially be the same as the euro, but not tied to a physical currency, instead simply a digital representation of the euro. Digital currencies controlled by a central bank are referred to as Central Bank Digital Currencies (CBDCs).

As we covered in our previous article on CBDCs, there is discussion amongst banks and economists about implementing digital versions of many other currencies, not just the euro. But what is it about a digital currency that banks find appealing?

Benefits of a digital euro

A digital euro would essentially operate as a digital form of cash, and be transferred in the same way. With the use of digital devices to use cash nowadays, many people wouldn’t even notice a difference in their day-to-day spending.

But for consumers and banks, there are many benefits of a digital currency, and implementing a digital euro could improve banking in Europe in a variety of ways.

Efficiency & costs

A digital euro could potentially make payments faster and more convenient, as the reliance on cash and other electronic payments would be reduced. There would be no need for intermediaries such as banks or payment processors. This would be ideal for both banks and customers, as banks would be able to process the transactions faster, and customers would be able to use the currency with lower fees.

Financial inclusion & development

In emerging financial markets, such as in Southeast Asia, many people are unbanked, or underbanked, yet have access to a mobile phone. This means that while many of them are financially disadvantaged, they are technologically savvy, and currently using e-commerce and mobile wallets to pay.

A digital currency would mean that this development would be even stronger and more secure, and allow payments that can be regulated as well as provide access to financial products that are safe and secure.

It has been estimated that more than 13 million EU citizens still lack access to formal financial services – a digital euro could remedy this.

Security

Due to the digital ledger aspect of a digital currency, similar to a cryptocurrency, a digital euro would have significant security advantages, as counterfeiting would become almost impossible. This is because transactions cannot be falsified and must comply with the blockchain, otherwise they will not go through. Banks would be able to verify transactions directly, and add greater encryption to ensure that customers’ euros are safe. In areas where fraud is prevalent, a digital euro would reduce this significantly.

Greater control

With how unwieldy an economy can be, even currencies that are perceived to be the most stable, such as the pound and the euro can sometimes lose control. A digital euro for example would mean that the ECB would have greater insight and control over the eurozone, and be able to anticipate fluctuations better.

The Eurozone debt crisis in 2009 may not have been as severe if European governments and banks had greater control and foresight over the currency.

Disadvantages of a digital euro

Digital currencies are generally a foreign concept to the world, so the potential dangers are unknown. Some economists are even unsure whether a digital currency is even possible, and whether a currency could not only be free floating, but free from a physical currency entirely.

Here are some of the other potential disadvantages of a digital currency:

Privacy concerns

If a digital euro was implemented, the EU would have even more control over the currency than they already do. Banking would also be tracked via mobile devices and desktop, which would mean banks would be able to monitor activity to a new level, and potentially manipulate spending behaviour, and trace and restrict payments as they liked.

Over-reliance on technology

Technology is already such a huge part of our lives, and the foundation of so many systems. Putting a central currency such as the euro into the hands of technology is a potential danger, as if the technology fails, money and transactions could disappear.

Unknown variables

There is still a huge question mark over whether a digital euro could even work. Even introducing the euro was shaky, and suffered several slips in value before it became stable again – followed by the debt crisis less than 10 years later.

The release of a digital currency would be a significant change, so despite the benefits, it would inevitably cause some shocks as the economy adjusted.

Would the digital euro be a cryptocurrency?

No. The digital euro would not be a cryptocurrency, as it would be regulated by a central authority, in this case the ECB. While it would operate similarly to a cryptocurrency, in it being digital-only, it would still be fundamentally different.

This is because a cryptocurrency is backed by nothing except the trust in the currency, whereas a digital currency is not only regulated by a central authority, this authority has an obligation to maintain the value of the currency, and to ensure that an exchange is always available. Furthermore, the ECB would have control over the value.

Is the digital euro happening?

Potentially. As of November 1st 2023, the ECB is starting a two-year preparation phase for the digital euro where it will “finalise rules, choose its private-sector partners and do some testing and experimentation”.

Once this period is over, the ECB will make a determination about whether the digital euro is a possibility or not.

Banks of many countries are also keen on the ideas for many of the reasons listed above, and it will allow them to streamline their processes in new ways. According to PwC, “over 80% of banks are considering a CBDC”. Digital currencies could potentially be the future as more and more consumers move to contactless and digital-only financing. Once major banks begin to roll out, only then will we be able to judge the advantages and disadvantages.

For more currency news and insight into the ever-changing world of currency, make sure to stay up to date with our Expert Analysis, as well as our Market Commentary.