The digital Euro takes shape in 2022 | Hogan Lovells

The European path to a central bank digital currency (CBDC)

Most central banks are in the process of evaluating, designing or even launching a digital version of their official currency – as an alternative means of payment based on a crypto token. An up-to-date overview of the current status of all CBDC projects can be found at To name a few:

  • China has been experimenting with the digital yuan (or renminbi) since 2014, launched a pilot project in four major cities in 2019 and is now expanding it to six more cities, including Shanghai.
  • Similarly, Sweden moved from a pilot scheme with simulated participants to testing the e-Krona with a small number of real market participants.
  • A number of Latin American countries are particularly interested in CBDCs. In the Bahamas, the Bahamian “sand dollar” has already come into effect and seems to work as a means of payment of sorts – now extending to the payment of certain salaries. As with some of the official currencies in this region, there is a certain tendency to peg or even denominate the respective digital currency in US dollars, as Ecuador did with its Dinero Electrónico, which was a functional CBDC for payments in this country from 2014. until 2018. None of these CBDC initiatives should be confused with the path chosen by El Salvador – to give Bitcoin the status of “legal tender”, i.e. the status as a fully legitimate means of payment. As we will see, cryptocurrencies such as Bitcoin on one side and CBDCs on the other are quite distinct in their nature and application.

The ECB joined the CBDC explorer central bank club relatively late. In January 2020, she set up a working group, mainly in reaction to the growing relevance of stablecoins – and their challenge to the euro as a means of payment in e-commerce. In October 2020, it published a “Digital Euro Report” which can be seen as a guiding document for all further reflections. In August 2021 he decided to go ahead with the project and in October 2021 he launched an investigation phase which is expected to take place in 2022. The plan is to build on these findings and develop a design for the digital euro in 2023. If all goes according to plan, 2024 could be the year of the test pilots and the digital euro could go live anytime from 2025.

The digital euro as a means of payment

Before looking at the choices that need to be made, there are a few characteristics that the digital euro will share with most other CBDCs. These characteristics are best explained compared to all other means of payment:

  • Cash – the digital euro is supposed to work in the same way as cash: like euro banknotes and coins, the digital euro offers a direct claim on the European Central Bank. This shields it from any insolvency or other instability of a bank or any other intermediary.

Unlike cash, however, it will be used digitally and in a programmable form – which should make it suitable for smart contracts and any type of e-commerce transaction. Another difference with cash is the level of confidentiality of the digital euro. Although much debate will focus on its specific level of privacy, it is safe to say that a payment made with a digital token can hardly ever be set up as anonymously as a cash payment.

  • bank money is the money that customers hold in their bank account. Unlike cash or the future digital euro, it represents a claim on the bank and therefore always depends on the solvency and functionality of this bank. Although there are online banking services, bank money is complicated to manage in e-commerce, not to mention its unsuitability for smart contracts.
  • Electronic money is similar to bank money as it is entirely dependent on the e-money institution it issues. And although it was born to support e-commerce transactions, it cannot be easily tied to a smart contract and therefore struggles with functionality that one would expect from any crypto token. – as a native digital asset.
  • Stable Coins are cryptocurrencies that intend to eradicate the volatility that makes Bitcoin and Ether an unattractive means of payment. There are many types of stablecoins – issued by a regulated institution and pegged to an official currency (like the JPMorgan Coin or Diem (formerly Libra)), issued fully decentralized (like Tether or TrueUSD), not backed by cash official but other crypto-assets (like DAI) or commodities (like USD Gold) or even a simple algorithm (like AMPL or Frax).

Since stablecoins are native digital assets with a particular focus on stability of value, they share a number of qualities that the future digital euro should have, including their viability to serve as a simple means of payment in a fully digital environment. The main difference between the digital euro and a stablecoin is that the latter are not backed by a central bank and therefore depend on the functionality of a system managed either in a decentralized way or by a private institution. Simplifying a bit, we could say that the digital euro will be similar to a stablecoin with the notable difference that it is issued and administered by the ECB.

  • Other cryptocurrencies such as Bitcoin, Ether and others do not really serve as a means of payment. As a rule, they are too volatile. Moreover, they are so far not really suitable for the huge amount of small payments that have to be processed on a daily basis. As things stand, established cryptocurrencies are better suited as a means of investment. Changing this is the goal of some crypto techniques – none of which have a high market penetration yet.

Shaping the digital euro

In its report on a digital euro, the ECB has already defined a number of principles and qualities for the digital euro, such as:

  • It must be a means of payment and not of investment. This has considerable consequences. It requires that the retention of an “undue” amount of digital euros is prevented – possibly by certain technical features such as caps per account holder or levies that increase with the amount of digital euros on the account.
  • It will be an attractive alternative to cash. In order to make this viable also outside of e-commerce, solutions for offline payments must be found. This is no small task as it will require devices that store relevant values ​​securely during offline time.
  • It should have all the features of stablecoins, including their programmability. In other words, the digital euro will function as a crypto asset that can be integrated into a smart contract solution, i.e. fully automated payment transactions without requiring any human intervention.
  • The digital euro should be, to some extent, available for transactions outside the eurozone. This must always be weighed against the interest of avoiding the pooling of excessive amounts of the digital euro – in particular by market participants outside the euro zone.
  • The digital euro must be state-of-the-art in terms of cybersecurity and system robustness. As with any crypto asset, any undue interference would be catastrophic for reputation and trust in the digital euro.

Based on these established principles, there are a number of questions that still need to be answered. Of these, two stand out: (1) to what extent will payments with the digital euro be private, confidential or anonymous and (2) what is the place of existing financial institutions in issuing, depositing or the transfer of digital euros for their customers? The two issues are strongly interconnected as the following three alternative ways of shaping the digital spectacle of the euro (taken from the ECB report on a digital euro):

  • One option would be for owners to hold an account (or wallet) for their digital euros with the ECB. This would mean that not only the issuance but also the processing of transactions with the digital euro would ultimately take place within the ECB. In this model, merchant banks could perform support functions for the ECB (such as KYC and similar), but the core account management activities would fall to the ECB. Such a model would not only require a very significant investment in the ECB’s systems and infrastructure, but it would also make all transactions highly visible to the ECB.

© European Central Bank, 2020

  • In a second model, the ECB would issue the digital euro but highly decentralize its processing, putting it in the hands of the holders themselves. This would bring the digital euro closer to stablecoins. The functionality would be similar to other crypto assets. In theory, this would allow the utmost privacy with regard to any payment made with the digital euro. Yet that would leave the question of the role of merchant banks. Also, it may be more difficult to pursue some of the policy objectives that the ECB has signaled for the digital euro, such as avoiding undue hoarding. It would also be more difficult to prevent cases of illicit use.


© European Central Bank, 2020

  • There are also a number of possible intermediate solutions – for example that the ECB entrusts the merchant banks with the complete function of depositing and processing the digital euro – with a greater or lesser degree of information flowing from the banks of business to the ECB. Obviously, any such intermediate model is closest to what we now call “bank money,” that is, money held in the accounts of banks. The advantage would be to rely on a functional system and to use the same level of confidentiality that customers know today with their banking transactions. The possible disadvantages would be the continuation of a system of intermediaries which can lead to certain inefficiencies and an accumulation of costs.

ECB Chart3

© European Central Bank, 2020

Next steps

The discussion of these and other system choices has now begun. We will follow them closely and keep you informed.

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