The Digital Euro: Cash, Cards or Coins?

By Sofia Nothhelfer Campuzano

When was the last time you paid in cash? The latest figures published in 2024 by the European Central Bank (ECB) show an upward trend towards digital payments. The results revealed that 54% of consumers prefer paying with cards or other non-cash methods. In response to this, the ECB launched a two-year investigation phase into a possible central bank digital currency (CBDC), a project examining the ways in which a digital euro could be implemented into the economy. Those who favor the digital euro argue that it would strengthen monetary sovereignty. However, the project has  been heavily criticised for the disruption it could cause to the financial system. This debate raises a central question: should Europe embrace a digital euro?

What is the digital euro?

The digital euro would be an electronic version of cash issued by the ECB rather than a commercial bank, meaning that the digital euro would be a direct claim on the ECB. This means that the money would be owed by the ECB instead of a private account, so the holders would not be exposed to the risk of their bank failing. Importantly, the digital euro is not meant to replace cash. In 2023, when the European Commission presented its proposal as part of a wider Single Currency Package, it highlighted that the digital euro is designed to complement cash. The package includes a proposal for the legal framework for the digital euro as well as a separate regulation protecting the legal tender status of euro banknotes and coins. The latter would ensure that the euro banknotes and coins remain accessible to everyone and people continue to have the option to choose between cash and digital payments. 

Benefits for consumers

For consumers, the digital euro offers three main features: convenience, safety and financial inclusion. Firstly, the digital euro would be directly accessible through a phone, allowing for immediate local or cross-border money transfers. Secondly, it would ensure that transactions between people take place in a secure environment. Thirdly, the digital euro would support digital financial inclusion. This would be particularly meaningful, given that financial literacy remains uneven across Europe and groups with low financial or digital skills are more likely to be left out of the financial system. Reports from the World Bank show that across Europe and Central Asia over 80% of unbanked adults own a mobile phone, demonstrating that phone ownership is far more common than bank account ownership. These findings are complemented by the reports from the ECB, which state that approximately 13 million adults in the EU have no access to payment accounts and remain unbanked. The digital euro is an economic response to this disparity, as it would allow people without a bank account to have offline access to digital euros. In the long run, the digital euro would not only modernise the payment system by aligning it with consumer habits, but it would also strengthen financial inclusion within the euro area.

Claiming Monetary Sovereignty

In addition to the individual benefits for consumers, the digital euro also serves the ECB’s broader objective of securing monetary sovereignty. For the ECB, this constitutes increased control over  the payment systems that are used for the euro. Due to the decline in cash and the increase in card payments, European consumers increasingly rely on digital payment services provided by non-European companies such as the card schemes Visa and Mastercard. According to the ECB, two-thirds of card transactions and payments in the euro area are regulated and processed by non-European firms. This indicates the heavy reliance on external companies, which determine transaction fees, technical standards, and operating rules over which the ECB has little influence on and as a result, limits the ECB’s monetary sovereignty. In the face of geopolitical conflict, strong dependencies on non-European firms has shown to destabilise and weaken countries. For example, Visa and Mastercard suspended their operations in Russia in 2022 following the Russian-Ukraine war, demonstrating the significant control these firms hold over countries’ payments. In addition, dependence has also exposed European payment data to non-European companies. A large share of retail payments in Europe is processed by non-European companies and stored outside the EU’s jurisdiction. The digital euro would provide a solution to both of these issues. On one hand, it would reduce Europe’s reliance on foreign providers by establishing its own system and necessary infrastructure. On the other hand, it would also keep payment data within Europe, ensuring that the data is handled in accordance with  EU data protection laws.

Challenges and Disruptions

Nevertheless, the implementation of the digital euro, particularly the issue of how to safeguard privacy, has conflicted with existing policies. Given that digital payments are recorded in a ledger, involving a third party, the payments are traceable. In order for payments to remain untraceable, the system has to be designed in such a way that it does not register the payments. However, these data protection requirements conflict with anti-money laundering (AML) policies, which demand that transactions remain traceable in order to combat illicit transactions and tax evasion. The Bank for International Settlements has pointed out that fully anonymising the digital euro could facilitate money laundering and the financing of terrorism. These large-scale illicit transactions would be accelerated by the digital form of the euro, as the anonymity and speed would allow illicit payments to move instantaneously. As a result, the European Commission suggested that the digital euro should have a similar level of privacy as cash, where the transaction data is only known to the payer and the payee, without full anonymity. 

In addition to this, the digital euro could disrupt the existing financial system by undermining the role of commercial banks. Banking representatives have stated that it would turn central bank money “into a direct competitor of commercial bank money”. This competition arises as consumers move part of their household savings out of bank deposits and into the digital euro, which is a risk-free claim on the ECB. With fewer deposits, commercial banks can lend less money, which in turn increases borrowing costs. A potential solution to this problem would be to enforce a holding limit, meaning that only a certain amount of money can be held in digital euros. However, this does not solve other potential financial disruptions such as bank runs. A bank run arises, when depositors fear that a bank might fail and, thus, withdraw their money from the bank. The practical and physical obstacles that are currently tied to removing large amounts of cash would be eliminated by the digital euro, as people could digitally move their savings and deposits out of a bank into another one within minutes. This would accelerate the process of bank runs. 

Thus, the implementation of the digital euro requires policy-makers to consider its effects across different sectors, taking into account a variety of potential outcomes. Most importantly, policymakers and the ECB need to consider the protection of individuals’ privacy and the financial stability of commercial banks. The success of the project depends on the robustness of the legal frameworks and regulations. If these are effectively implemented, the digital euro could bring significant economic benefits by speeding up transactions, promoting financial inclusion and making payments more convenient for consumers. 

Sources: European Central Bank, European Commission, Bank for International Settlement, Risbank

Written by Sofia Nothhelfer Campuzano

Edited by Elizabeth Gillen and Nina Lewandowska