Two years after the launch of the project, the digital euro, the digital version of the European currency, will be equipped with a first legislative framework. The European Commission proposed on Wednesday June 28 two proposals for regulations to regulate the use of this new digital asset, intended as an alternative to cash in an increasingly digital world.. “The euro is a clear European success: a trusted global currency that symbolizes our strength, our unity and our solidarity. However, as more and more people choose to pay digitally, the euro should reflect and adapt to the digital age,” presented Vladis Dombrovskis, Executive Vice-President at the European Commission.

The European Central Bank (ECB) launched a ” pilot project “ in the summer of 2021 with the idea of ​​offering a digital retail euro by 2028. This project provided for strong involvement of member states due to “considerable consequences for citizens and businesses in the euro area, as well as for financial stability”wrote the French and German finance ministries.

A political construction

This project, like that of the creation of the euro, is above all political. It was launched under the impetus of private projects using cryptocurrencies as a means of payment, like Libra then Diem by Facebook (finally abandoned) or the development by other central banks, first and foremost that of People's China, digital version of their currency.

“The work was very inspired by this need to ensure strategic autonomy of our payments in Europe”, recognizes a senior European official in Brussels. This reflects a shift on the part of the European Commission, which had the doctrine of considering the issuance of electronic money as strictly the responsibility of economic players in the market.

Since the start of discussions in 2019, it has mainly been a question of delimiting the perimeter of this digital currency. This is what these two proposed regulations are proposing today at the EU summit.

A retail currency for everyone

So what will the digital euro look like? “It is a digital form of euro cash”, we summarize from Brussels. It is therefore a retail central bank digital currency, positioned as a means of daily payment and which will be distributed free (and obligatorily) by commercial banks, in the form of a “ wallet » (digital wallet) housed within a mobile or online application.

Digital euro: the Banque de France specifies the contours

The digital euro will therefore be accessible to 350 million consumers and 50 million businesses in the euro zone. It will be both free and unpaid. The European text also plans to cap a transaction at 3,000 euros to avoid abuse but undoubtedly also to guard against any risk of “ bank run “, that is to say the flight of digital euro deposits to the central bank in the event of a crisis of confidence in a banking establishment. The American banking crisis of spring 2023 left its mark.

Payment offline

The digital euro will not be a programmable currency, that is to say dedicated to certain expenses, such as the payment of taxes. As with cash, it is the user who decides whether or not to pay with the digital euro. This new means of payment will be accepted by everyone in the euro zone, including for cross-border payments. The Commission emphasizes the financial inclusion aspect of the digital euro, while access to cash is starting to pose a problem in certain countries, particularly for the most fragile or isolated populations.

“Sixty percent of Europeans think it is important to keep cash as a means of payment, but there is growing evidence that accepting and accessing cash is a problem . This is why we are acting to enshrine the definition of legal tender in Community law, so that our citizens can continue to pay in cash throughout the Eurozone for daily transactions,” says Paolo Gentiloni, European Commissioner for Economy in a press release.

Finally, and this is an innovation (which however remains to be developed), the payment offline (without internet connection), for example from phone to phone, will be possible to stick as closely as possible to the use of cash. Payments will be instantaneous by nature and the Commission ensures a high level of confidentiality of personal data, again comparable to payment in cash. Concretely, neither the European Central Bank nor the national central banks will have access to the identity of individuals or companies, certifies the Commission.

“This is not a Big Brother project”said Financial Services Commissioner Mairead McGuinness.

All that for this ?

It then remains to explain to the public and the banks the interest of the project. Commercial banks, which view the emergence of the digital retail euro with great distrust, undoubtedly for fear of being deprived of part of their resources, have no problem repeating that the digital euro does not respond to no need, given the already existing range of payment methods and the pan-European EPI project, supported by major European banks.

“The why of the digital euro remains a question to be explored”, recognizes a source close to the ECB. “We have some preliminary elements today on the why, the drivers as they say so well, of the digital euro. But, above all, we are in a world where the use of cash is clearly decreasing and central banks must logically ask themselves what happens to cash in a digital world. The answer today is to say that we must create a digital banknote, which also refers to questions of strategic independence, of autonomy in the world of retail payments within a European framework. The answers are not yet obvious,” adds this expert to The gallery.

Defending the (European) central bank currency

On the Commission side, we want to be pragmatic. First of all, it is about maintaining access to central bank money in the digital age (and not being eaten away by other digital currencies). Then, the digital euro is a guarantee that payments still work in a digital world, with the same level of security as the euro.

It is also a means of payment that can be used everywhere in the euro zone, and in all circumstances, unlike current means of payment (except cash, and still), which remain very fragmented (a Belgian cannot use his card a toll in France, unless he has a Visa or Mastercard). It is also, according to a person close to the Commission“the assurance of having data protection at a level never before achieved in digital technology”.

“It’s true that for the moment there is not a really significant need to release a digital euro. But, when we see how quickly the economy is digitizing, there will certainly be new needs in the future for which there will be a need to have a digital currency. This is why around a hundred countries around the world are considering or developing digital currencies”says another source in Brussels.

Reassure the banks

The success of the digital euro relies on the support of commercial banks. It's not win. “If we have a PPE that works, we can ask the question of the usefulness of the digital euro. We can always do things that are useless, it won't be the first or the last time.” said Thierry Laborde, Deputy Managing Director of BNP Paribas, during a presentation at the beginning of June of the bank's payment strategy. Incidentally, the digital euro could be easily integrated into the wallet EPI, which also participated in the work of the ECB.

For the European Commission, the advent of the digital euro should not upset the balance of the current economic model of payments (free for the consumer, commissions for the merchant). “The objective is that the costs of the sector are covered, otherwise it will not be able to work. There is no reason to distrust the economic model,” we estimate in Brussels. Especially since the Commission hopes that the costs of digital euro infrastructure will be lower than in current systems.

Finally, the risk of deposit flight could be offset by a specific refinancing line with the ECB. For supporters of the project, the digital euro should on the contrary strengthen the intermediary role of banks in the decentralized world of cryptos by creating a bridge between the bank account and the wallet.

The issue of trust

“There are still many open questions,” estimates a payment manager from a large mutual bank. But, he adds, “There are two important things to take into account. First of all, currency which raises a huge issue, that of confidence. During the transition to the euro, banks carried out enormous work over several years to support consumers and traders, particularly in response to fears of a sudden rise in prices. The transition to the digital euro will undoubtedly be much more complex to implement because it will bring much more profound upheavals for users. Hence the second essential subject, that of technology. It is absolutely strategic to know how to position yourself in this area.”

One certainty all the same: the technology selected must serve simple uses and uses. “This is what must guide us to avoid transforming an expert project into a commercial disaster simply in the name of technological progress”says a banker.

The technological choices have not yet been made. The ECB is expected to close an exploratory phase next October and governors will decide on the next phase. In reality, the ECB is engaged in a “realization” phase which may last several years, in close collaboration with all stakeholders, including the banks (with some hiccups at the end of 2021 and beginning of 2022), and of course with the legislator and the Commission.

Blockchain aside

The ECB obviously has experience with market infrastructures that have proven themselves (such as Target and Target 2). It is rather on this track that the ECB is working. “The digital euro will not necessarily be on a blockchain”, says an expert. The ECB's thoughts on the architecture are also public and the central bank does not hide its very serious reservations about blockchain technologies. “which are certainly not favorites”, specifies a central banker.

On the other hand, the experiments carried out by the Banque de France on wholesale central bank digital currency have successfully demonstrated the possibility of launching them quickly by relying on blockchain technology.

Nothing is set in stone, far from it. In Brussels, we assure that this digital euro will be “ scalable ” And “a product decided democratically”. The legislative work is therefore only just beginning. But the European elections in June 2024 risk further postponing the organization of the trilogue (Commission, European Council and European Parliament) on the digital euro.