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The digital euro: a new era
In today’s era of relentless digital advancement, innovation is emerging as a key element that is redefining the dynamics of our society. Among the many innovations underway, the digital euro stands out as a significant step in the transformation of payments, with the potential to impact several key sectors. This initiative is part of the broad framework of the European Digital Decade, which aims to strengthen Europe’s digital sovereignty and set its own standards, focusing on data, technology and infrastructure, and reflecting a growing interconnection between technological innovation and socio-economic development. The proposal to introduce the digital euro is currently being developed under the supervision of the European Central Bank (ECB). The digital euro is configured as a Central Bank Digital Currency (CBDC) or digital currency, i.e. the digital representation of a national fiat currency, understood as legal tender, issued and managed by a sovereign institution such as a central bank. The digital euro will have the same value as its paper counterpart, but it differs from traditional currencies in that payments with digital currencies coincide with the actual movement of money, similar to what happens with the physical exchange of cash. In contrast, electronic payments, such as those made with credit cards or wire transfers, are promises of payment. The digital euro is designed to coexist with, but not replace, cash and needs to be functionally different from other electronic payment instruments to be complementary without competing with commercial bank money and other investment initiatives. In addition, in the design phase, it will be essential to design it so that it is used as a means of payment and not as a store of value. To facilitate transactions with the European digital currency, the ECB could opt to implement a mobile service, as an alternative to the proposals provided by other payment system operators. A secure option for storing and using digital euros could be the use of the European Digital Identity Wallet
. Proposed by the Commission with the aim of simplifying the access of individuals and companies to public and private online services, the wallet is currently being tested for specific use cases by the Autonomous Province of Trento, which has taken on the role of a pioneer in Italy. It is crucial to emphasize from the outset that digital currencies should not be confused with either cryptocurrencies or stablecoins. The fundamental peculiarity of cryptocurrencies lies in their decentralized nature, which clearly differentiates them from CBDCs, which, issued and regulated by a central bank, lose the autonomous and distributed character typical of cryptocurrencies. In addition, while cryptocurrency markets are notoriously volatile, with prices and values constantly fluctuating, CBDCs, being tied to the country’s fiat currency, exhibit much lower volatility. Finally, it is important to note that the technology behind cryptocurrencies is blockchain, which is not a prerequisite for the creation of a digital currency. In the event that a CBDC opts for the use of distributed ledger technology or a blockchain, these would certainly be private or permissioned in nature.
A strong push for change
The introduction of the digital euro can play a key role in the ongoing digital transition phase that permeates several sectors, including the world of payments. A clear sign of this evolution is evidenced by the constant growth of electronic payments in our country: according to the Innovative Payments Observatory of the School of Management of the Politecnico di Milano, in the first half of 2023, digital payments transactions in Italy reached 206 billion euros, up +13% on the same period in 2022. The adoption of a CBDC is a key strategic pillar that goes beyond simply responding to the growing trend towards digital payments. This step is also motivated by the need to preserve the monetary autonomy and sovereignty of the Eurosystem, especially in view of the constant spread of digital currencies issued by other central banks or private entities. The digital euro would provide the ECB with a new monetary policy tool through which it can control interest rates and inflation, in a more flexible and effective way, and would help reduce the euro area’s dependence on non-European payment service providers. Currently, the main providers of electronic payment services, such as PayPal, Visa and Mastercard, are American companies. The digital euro would make it possible to offer a European alternative to these services, increasing the EU’s competitiveness and the efficiency of cross-border transactions. One of Europe’s goals with the introduction of a digital currency is to improve the efficiency and security of the entire European payments ecosystem, acting as a catalyst for innovation and helping to consolidate the resilience of the system against potential threats and cyberattacks. In particular, the digital euro will be designed in such a way that it can also be moved off-line, reducing the risk of collapse in the event of a blackout. The issue of security is intrinsically linked to the issues of privacy and traceability of transactions. On the one hand, the digital euro could make a significant contribution to increasing the financial stability of the European Union, ensuring greater transparency in financial transactions and thus providing a potential tool to address challenges such as tax evasion or terrorist actions. On the other hand, the adoption of a digital currency allows for a greater level of traceability of transactions which raises concerns about the protection of individual privacy. The availability of detailed financial data could potentially jeopardise the privacy of European citizens, leading to ethical questions regarding the management and use of personal financial information. In this context, it will be crucial to develop a digital currency that represents a balance between the need to ensure financial security and the protection of individual privacy. This can be achieved through the creation of robust and advanced data protection mechanisms, including the use of advanced encryption techniques, and the establishment of clear privacy regulations. Transparency in the operation of the system and the involvement of stakeholders in the definition of security and privacy policies will help to create a digital currency that can meet the needs of financial security, minimizing the impact on individual privacy and complying with current ethical and legal standards.
CBDCs around the world
Europe is not the only player on the ambitious path of introducing its own digital currency. There are more than a hundred governments and central banks around the world that are actively considering or have already implemented their own CBDC. Among those that have already launched their CBDC, China stands out with the eCNY, which embarked on the path with a pilot phase in 2019 and used it for the first time at the Beijing 2022 Olympic Winter Games. Other countries that have their own digital currency are the Bahamas with the Sand Dollar, Nigeria with the eNaira, and several Caribbean states, including Jamaica with JAM-DEX. A key objective common to many countries, including Europe, related to the introduction of a CBDC is to promote financial inclusion among those currently excluded from electronic payment systems, such as individuals with limited digital skills or residing in disadvantaged geographical areas, where the availability of cash can be problematic. The aim is to ensure access to modern financial instruments for all segments of society, thus helping to reduce the existing financial gap. Hong Kong currently stands out for its experimentation projects in the field of digital currencies, with particular reference to e-HKD, a CBDC developed by the Hong Kong Monetary Authority (HKMA) as an integral part of its Fintech 2025 strategy. The goal of the HKMA is to revolutionize Hong Kong’s financial landscape, to strengthen financial stability and cement Hong Kong’s position as a top-notch international financial center. In May 2023, the HKMA announced the launch of the e-HKD pilot program, aimed at exploring potential use cases of e-HKD in different categories. These include tokenized deposits, settlement of web3 transactions, and settlement of tokenized assets. Hong Kong’s active participation in this pilot program demonstrates a proactive approach to taking advantage of the opportunities offered by digital currencies. A significant collaboration within the program involves Ripple and Fubon Bank to promote the use of digital assets in Hong Kong, focusing on the tokenization of real estate assets and the issuance of shares via e-HKD. This partnership also highlights the potential for a future financial structure where CBDCs and other digital assets can collaborate synergistically.
Challenges and opportunities of the digital euro
The digital euro is designed as a driver of innovation in the payments sector. Its introduction is expected to act as a catalyst for new service models, advanced technologies and innovative approaches, helping to shape the future of the payments landscape in Europe. Its introduction poses banks, service providers and businesses facing a number of challenges to try to seize all the opportunities that the introduction of a CBDC can offer, and, at the same time, to adapt their internal infrastructures to be able to support the technological scope of this phenomenon. The digital euro It won’t be a programmable coin, i.e. it will not natively support the ability to define automatic rules or smart contracts through computer code, but this feature opens up the possibility of Interesting business opportunities for companies and startups. These can develop solutions and services that leverage the unique characteristics of a CBDC, such as payment platforms, advanced financial applications, or wealth management services. An example of an advanced solution is the use of artificial intelligence in payment services with CBDCs, with the implementation of predictive algorithms capable of analyzing users’ spending behaviors, offering personalized suggestions, and anticipating their needs. In addition, the integration of the digital euro into IoT devices would allow transactions to be carried out seamlessly and automatically. This paves the way for a range of scenarios and applications, such as contactless payments through smart homes, autonomous vehicles or wearable devices. As of July 2023, the European Central Bank (ECB) has launched a sandbox project called the “European Blockchain Regulatory Sandbox.” This initiative aims to explore the use of blockchain technology, providing a pan-European regulatory framework to foster regulatory dialogues and increase legal certainty for innovative blockchain-based solutions. Running from 2023 to 2026, the project will annually support 20 projects, including public sector use cases on the European Blockchain Services Infrastructure (EBSI). Within this environment, companies and public bodies will have the opportunity to experiment and test the impact of their digital solutions, also integrated with a possible CBDC, in a real but safe context. In a context of continuous digital evolution, these proposals represent only the beginning of the opportunities offered by the adoption of a digital currency. Collaboration between key sectors, such as fintech, artificial intelligence and IoT, promises to lead to innovative solutions that radically transform the way we conceive and experience digital payments. The growth of an integrated and intelligent digital financial ecosystem looks set to redefine our approach to financial services.
Stages of the digital euro
The European Union launched the digital euro project in July 2021, starting an investigation phase that ended in October 2023. During this period, the ECB and the national central banks of euro area countries conducted in-depth studies on the feasibility and impact of introducing a European digital currency. The results of these detailed analyses, published by the ECB, show that, if carefully designed, the digital euro can be integrated into existing payment systems, responding to the complex needs of the entire Eurosystem. The prototypes developed and the tests conducted between July 2022 and February 2023 provided an assessment of the feasibility and effectiveness of the proposed solutions, allowing a refinement of the initial concept in response to market dynamics and user expectations. The ECB has clearly outlined the key features and expected functionalities of the digital euro through a high-level description of the product. On 28 June 2023, the European Commission presented a draft legislative proposal. The aim of the legislation is to ensure that a possible digital euro in the future offers citizens and businesses an additional digital payment instrument that can be used in any euro area country as a widely accepted, affordable, secure and resilient form of public money. At the same time, the Rulebook Development Group, in close cooperation with market representatives, including users, retailers and intermediaries, engaged in the development of a manual of standards, defining essential rules and operating procedures for the use of digital currency. Following the conclusion of the appraisal phase, the Governing Council of the ECB decided to proceed with a preparatory phase, which began on 1 November 2023. This phase is aimed at the further development and testing of the digital euro with the characteristics and technical requirements defined during the preliminary phase, and will therefore see the legislative and design processes proceed in parallel. While the start of the preparation phase represents a step towards the adoption of a European CBDC, the Governing Council is not bound to take any decision on the issuance of the digital currency, which is currently scheduled for 2026. The final decision will be taken only after the adoption of the relevant legislation, ensuring a thoughtful approach that complies with regulatory needs and market dynamics.
Looking forward to the next phase
We have seen how the digital euro is not only a response to the ongoing digital dynamics, but also a fundamental tool for consolidating the security and stability of the Eurosystem’s financial system, preparing it to face the emerging challenges in an increasingly interconnected and digitalised context. The real success of the digital euro will be determined by its large-scale deployment. In fact, only if it is widely accepted and adopted by a considerable part of the population will it be able to express its maximum potential. This will be achieved if citizens perceive that the new currency offers the same reassuring properties as cash. A further incentive to use digital currency will be the offer of services developed by innovators in the field and solutions that will allow to achieve full interoperability between existing payment systems. This interconnection between the digital currency and innovative services will also help to create a more attractive and functional ecosystem, in which companies and the world of research will be able to cooperate for the development of solutions with commercial repercussions on the entire industrial and PA fabric, allowing the euro area to successfully navigate the ever-evolving digital era. Carla Mascia, technology foresight officer, R&I System Development Area Fondazione HIT – Hub Innovazione Trentino (Photo by Allison Saeng on Unsplash)
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