The Dawn of the Digital Euro: An Examination of the Planned Monetary Revolution

Josef Bergt
2023

Introduction

On June 28, 2023, the groundbreaking news was announced: the European Commission proposed the initiation of a digital Euro, taking a significant stride towards creating an internationally competitive currency. The digital Euro project has already been launched in 2021, as announced back then by the European Central Bank (“ECB”). This forward-thinking proposition left many aspects open, thus, we delve into an initial overview of the proposition below.

The Stance of the European Central Bank

The intention of the digital Euro is to serve as a virtual version of the collective cash of the community, aimed to enhance the security of electronic payment transactions. Comparisons to the utilization of credit cards and payment services like PayPal or ApplePay are inevitable, leaving one contemplating the distinct benefits and differences of the digital Euro.

Uniquely, the digital Euro is central bank money. The difference to bank deposit money, which is simply booked on the bank account, lies in the fact that bank deposit money only represents a claim against the bank. With bank deposit money, one is dependent on the liquidity of the bank, in the event the bank collapses, the balance is lost, apart from the deposit insurance. Central bank money, on the other hand, is virtually risk-free as a central bank, in this case, the European Central Bank, guarantees the value of the money it issues.

Therefore, a compulsory acceptance of the digital Euro comes alongside, meaning that traders are obligated to accept payments in digital Euro. However, micro-enterprises are exempt from this obligation if they do not accept any other digital forms of payment.

Operational Functionality

Comparable to a traditional bank account, users of the digital Euro will have the opportunity to utilize a payment account. This account allows the transfer of digital money to a wallet or card. Banks and other payment service providers authorized in the European Union can process payment services in connection with the digital Euro. This will facilitate the efficient dissemination of the new currency among the population.

Payments with the digital Euro are meant to be convenient, both online and offline. Unlike conventional online payments, the digital Euro does not require transferring information to the home bank, thus ensuring greater privacy. Especially in offline mode, the anonymity is reinforced as the bank only learns the amount used, similar to a cash withdrawal at the ATM.

Upper Limit for Holding Digital Euro?

The backing of the digital Euro by the European Central Bank (ECB) has caused concern among banks that existing bank deposits could drain since customers must not fear any losses. To counteract this, the commission aims to limit the use of the digital Euro as a store of value. For example, it is planned that the digital Euro will not earn interest. Furthermore, an upper limit for the amount of digital Euro a person can hold is suggested. An exact amount has not been mentioned, but a framework of 3000 to 4000 digital Euro per person or a limit on the number of transactions per month has been proposed.

Balking away from Cash?

With the introduction of the digital Euro, fears and concerns arise. Some citizens fear a first step towards abolishing cash, making them "transparent" vis-a-vis the state. The European Commission emphasizes that the digital Euro by no means is meant to replace paper and coin money, but simply offers an additional alternative to EU citizens and enables the European market to stay competitive and innovative in terms of digitalization in the payment sector.

Outlook and Further Action

Before the digital currency becomes reality, it will probably take some time. Not until about October 2023, the ECB will complete the investigation phase, in which it is examined how the digital Euro can be designed and technically implemented. After that, the ECB has to decide whether to begin implementing the digital Euro. The implementation phase itself is likely to take another 3 to 5 years.

The proposal must be approved in accordance with the ordinary legislative procedure of the EU by both, the European Parliament and the Council of the European Union, before the regulation can be enacted.

Therefore, there are two main bodies involved in the introduction of the digital Euro – namely, the ECB who will be in charge of issuing the digital Euro and creating an infrastructure for its distribution, and the legislative bodies whose role is to adopt an enlisting framework for the digital Euro into the current legal structure.

The digital Euro will be public money issued by the ECB and/or National Central Banks (“NCBs”), creating a liability on the ECB's balance sheet. To decide the legal basis for the digital Euro, the ECB will have to define the objectives the digital Euro is meant to serve. Primary aims include providing central bank money access to citizens in an increasingly digitized economy and fostering financial stability.

The legal basis for digital Euro issuance is led by Article 128(1) of the Treaty on the Functioning of the European Union (“TFEU”). The digital Euro is meant to mimic the essential features of banknotes, including being widely available and usable. That being said, the digital Euro as currently envisaged, varies from the banknotes concept owing to tight holding limits, remuneration, and limited privacy features.

The building, operating, and distribution of the digital Euro require the support of an elaborate infrastructure. It can be created by leveraging Article 127(2), fourth indent, TFEU and Articles 17 and 22 of the European System of Central Banks (“ESCB” or the Eurosystem, which comprises the ECB and the NCBs) respectively ECB Statute. Once these provisions are put in place, the ECB has the authority to ensure the smooth functioning of the digital Euro infrastructure as soon as the digital Euro has been issued.

To integrate the digital Euro into the EU's broader legal framework, an enabling legislative framework is necessary. This requires legislative amendments to current law along with new regulations, the process will inevitably be time-consuming causing a delay in the rollout of the digital Euro. A possible rollout in 2027 seems very ambitious due to the extensive amendments required in the European secondary and national law. It needs to be addressed that the digital Euro could take longer to launch than expected owing to the extensive legal and procedural adaptations it necessitates.

As soon as the legal act has been adopted and the ECB has completed its preparations, the proposal provides that it is within the competence of the ECB to ultimately decide whether and when digital Euro will be issued. Presumably, it will not be released until 2026 at the earliest, with an introduction in 2028 being more likely yet uncertain.

Source: Grünewald, S. (2023). A legal framework for the digital euro: An assessment of the ECB’s first three progress reports.

Executive Summary:

• The introduction of the Digital Euro by the European Commission offers an exciting opportunity to transform the financial landscape.
• This currency aims to achieve increased security and effectiveness in electronic payment transactions.
• Uniquely, the digital Euro is central bank money. The difference to bank deposit money, which is simply booked on the bank account, lies in the fact that bank deposit money only represents a claim against the bank.
• The digital Euro, under the guarantee of the European Central Bank, provides a virtually risk-free digital money option for individuals.
• Its operational functionality resembles traditional bank accounts, but is intended to offer greater privacy particularly in the offline mode.
• An upper limit for holding digital Euro is considered to prevent the draining of existing bank deposits.
• Although cash will remain part of the central bank money, the introduction of digital Euro serves as an alternative.
• The implementation of digital Euro will be a lengthy process, with the likelihood of it becoming a reality in 2028 onwards.