In July 2021, the European Central Bank (ECB) announced that it now intends to intensify its plans for a digital euro. The fact that this project is now increasingly coming into focus again is due to the approval of the European Council and the support from politics, both at national and European level. A two-year investigation phase will therefore begin in October 2021, at the end of which a decision will be made on implementation. If the decision to implement it is positive, a phase for developing solutions and testing them follows. ECB President Christine Lagarde thinks it is realistic that consumers will be able to shop with the digital euro in five years. But what exactly does “digital euro” mean, what is the background and what challenges does such a digital currency face?

What is the digital euro?

The digital euro should be equivalent to cash and a supplement to it. It is important to mention that the digital euro is in no way intended to replace cash. Like cash, it would also be issued, protected and regulated by the ECB and would therefore be on par with cash in terms of trustworthiness. The digital currency is to be kept separate from the money in the current accounts in digital wallets (so-called “wallets”). It should offer consumers and companies the opportunity to pay digitally with a currency that is backed by a direct claim against the central bank. This is intended to ensure the stability of the euro against crypto currencies, private digital currencies (e.g. Diem from Facebook) or digital currencies of other countries (e.g. China with the e-Yuan) and to guarantee the financial sovereignty of the euro area.

Background to the introduction of a digital euro

With the plans to introduce a digital euro, the ECB is primarily reacting to current news from other countries that are openly talking about plans to introduce digital currencies. Above all, China should be mentioned here, which currently plays a pioneering role in the development of a digital currency, the e-Yuan. In China, the first test runs with the digital currency have already been started in a few million metropolises. But the USA has also officially announced in the recent past that they are currently dealing with the topic of a digital dollar. Here, however, the process is not as advanced as in Europe, where the starting signal for the investigation phase has already been given.

In addition to reacting to the plans of other economic powers, a digital euro should also represent an alternative to private digital currencies such as Bitcoin and stand up to them. Even in the age of digitization, consumers should be given access to the safest form of money, central bank money.

When planning a digital euro, points relating to security and costs for consumers are always emphasized. When introducing a digital currency, security should be the top priority. The advantage of a digital euro is that, just like cash, it represents a direct claim against the central bank. Thus, the digital euro should be equal to cash, which is not the case with other digital currencies. The security is also based on the fact that the digital euro would even be protected against a possible bankruptcy of your own house bank. In addition, the digital euro should also have advantages in terms of payment costs on the Internet and offer a clear advantage over existing payment methods and digital currencies, especially for small payments.

Challenges of the digital euro

However, the introduction of a digital euro involves a number of hurdles that need to be overcome. The first thing to mention here is the development of a suitable business model. To this end, it is crucial to involve all market participants right from the start of the investigation phase. A digital euro can only work if all relevant groups – consumers, retailers, companies, banks and politicians – are involved and the requirements of these groups for a digital currency are taken into account. However, not all requirements can be met in equal measure. With the digital euro, the ECB and the Eurosystem are able to provide the public good ‘payment transactions’ for the common good. Various opinions and contributions from institutions, citizens and trade professionals can provide valuable input for an initial assessment.

This raises the question of how a digital euro must be designed in order to be successful and still enjoy full acceptance in Europe in 20 years. The creation of transparency and clear communication with regard to the effects and goals of the digital euro are an important factor and at the same time essential! Without the willingness of end users to accept and use the digital euro as a means of payment, the desire for digital European payment transactions will fail. The higher the acceptance among consumers, the higher the acceptance among merchants and the greater the willingness of intermediaries to develop payment solutions for end users.

In addition, realistically speaking, the two-year investigation phase must deliver the agreed results within the framework of the previously set goals. This is the only way to start immediately with the implementation of the digital euro and to ensure the competitiveness of the EU in the global context. It is necessary to analyze in detail the potential effects of a digital euro with regard to the core tasks and core functions of the Eurosystem in order to be able to derive corresponding requirements that the digital euro should fulfil, regardless of what concrete technical and practical design it will ultimately have.

In the first step, a digital euro can and should only supplement physical cash and existing cashless payment systems and not replace them. Just like cash, it must be accessible to everyone in Europe in order to be able to maintain and strengthen the identity-forming effect of the common currency. The challenge for the ECB and the Eurosystem when developing a business model is to provide a suitable framework for it. This requires the cooperation of all relevant national central banks in the EU. This ensures that the national requirements of the individual EU member states are included. This is the only way to show whether changes to the EU legal framework are necessary, which can only be decided together with all member states. Likewise, the creation or consideration of international interfaces to other digital currencies can also only be done together.

Choosing the right technical infrastructure is also a major challenge. The role of the private sector changes depending on whether a decision is made in favor of a centralized or decentralized infrastructure. For example, the possibility of mapping a digital currency using blockchain technology should be mentioned here. Irrespective of this, however, it is crucial that the private sector is encouraged in both constellations to establish or expand new business areas based on digital euro services.

Concrete examples that, from our point of view, must be considered for a business model for the introduction of a digital euro is a necessary concept of data storage and data backup that will form the basis for all further efforts. The setting up of needs-based regulations (personal data, upper limit for credit, proof of age, purchases suitable for minors, etc.) creates the basis for designing a framework concept that offers the necessary regulatory security for all parties involved. This also includes the implementation of control options (holding limits, staggered remuneration, etc.) as well as protection against technical failures and misuse. There is also no alternative to guaranteeing anonymous payments in compliance with the requirements for combating money laundering and terrorist financing.

When developing a digital euro, care must be taken to ensure that it is compatible with the solutions of providers of private payment services and that the investment costs are therefore limited to a manageable but necessary level. Compatibility with existing processes and IT infrastructures in industry that are already in use would ensure a certain degree of interoperability on the one hand, but would also create the possibility of replacing old processes under certain conditions on the other. The aim here is to identify potential for the providers of the current infrastructure. This would facilitate the provision of pan-European solutions and additional services to consumers. Nevertheless, clear communication is required that it cannot be done entirely without investment. Progress and innovations are always based on investments, without which no success can be generated. After all, every market participant in Europe would also like to benefit from a digital euro.

Of crucial importance here is free access to the digital currency for every consumer. Permanent availability (offline usability) should also be mandatory. The digital euro offers the opportunity to make digital payment transactions more resilient. In order to differentiate oneself from volatile financial entities such as bitcoin, currency stability in line with the analogue currency for the digital euro is a basic requirement, but this must be clearly positioned in the public eye. The possibility of integrating further services as well as the possibility to pay throughout the euro area and ultimately with a global orientation is an important factor for the end user. In addition, no additional costs may arise that go beyond the use of original cash. In order to be able to offer end users a supplement to cash, real-time settlement analogous to instant payment is necessary, so that payments can be finally processed within a few seconds.

In order to guarantee the relevance of the digital euro and to ensure that users can actually benefit from its advantages, the ECB and the legislature could consider an acceptance obligation in retail. Possible fees should be regulated along the entire value chain in the public interest and include all transactions and the use of the wallet on the consumer side.

The ECB and the Eurosystem must be guided by their fundamental goals and be measured against them. These include societal goals such as sustainability, autonomy and the prestige of Europe, as well as monetary, payments and store of value goals, which need to be aligned with the goals of other stakeholders. The primary aim is to rule out adverse effects on monetary policy and financial stability.

Overall, we are of the opinion that the business model should be launched with the definition of concrete functional use cases for the digital euro. The user-based design of these use cases is another central challenge during the investigation phase and at the same time a success factor for the acceptance of all market and user groups. In our opinion, the success of the digital euro depends on a comprehensive assessment of the challenges mentioned. Its introduction is always not only a technical, but above all a political decision. From this point of view, the challenges must also be shown and analyzed in detail. A holistic approach is the decisive factor here. Therefore, the development of a suitable business model for the digital euro is not based solely on the acceptance of retailers or the development opportunities of existing and future intermediaries, but as an interaction and with careful consideration of European contexts and markets.


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