The digital euro – results of the investigation phase and outlook for the year 2024

Central banks around the world are stepping up their efforts to research and develop their own digital currencies. The European Central Bank (ECB) is also considering the introduction of a digital central bank currency as an addition to cash and not as a replacement for it. Just over a year after China started the pilot phase for the digital yuan, the ECB started the digital euro project in 2021 with a two-year study phase for a possible introduction. This phase was successfully finished in the fourth quarter of 2023 with the transition to the preparation phase – a good time to take stock and provide an outlook for the year 2024.

Results of the investigation phase

The objective set by the ECB for the investigation phase was to clarify the design, issuance and distribution of a potential digital euro, taking into consideration various stakeholders. The main results of this phase of the investigation are as follows:

Issuance and settlement by the Eurosystem
The Eurosystem should act as an "enabler" for payment service providers by ensuring security and uniform standards for all users.

Distribution by payment service providers
Payment service providers are to act as a connection between the Eurosystem and the user and are in charge of the distribution of the digital euro. The prerequisite for being able to offer digital euro services should be the fulfilment of the PSD2 directive. These services are divided into three categories: liquidity management, transaction management and user management. Liquidity management refers to the topping up and withdrawing of digital euro credit. With regard to the transaction management, payment service providers are to be responsible i.a. for the initiation, authentication, confirmation and rejection of transactions. The user management includes, for example, the onboarding and offboarding of users and the management of payment instruments such as cards and wallet apps. In addition to wallet apps from private providers, a "digital euro app" with basic functions is also to be provided by the ECB.

Remuneration model comparable to credit card transactions
Like cash, the digital euro should be a public good that can be used freely and free of charge by all citizens. However, as payment service providers have to make considerable investments for the provision of their services, they can demand fees from merchants, just as they do for credit card payments. Analogue to the production and issuance of cash, the Eurosystem should bear its own costs.

Offline transactions via the secure element
Offline transactions should be possible between devices that are in close proximity to each other. For this offline functionality, credit must be stored in advance on the so-called "secure element" of the end device with an active Internet connection. Offline transactions can then be performed under consideration of restrictions, for example a credit transfer limit. In the event of loss, theft or damage, credit stored on the secure element cannot be restored.

Outlook for the year 2024

The ECB's investigation phase has provided the first relevant insights into the design and potential effects of a digital euro. The main focus was on aspects relating to the distribution of tasks, as well as technical and economic issues. Despite the progress made in the investigation phase, key questions remain unanswered. For example, the decision to realise the digital euro is still pending, the potential implementation has not been defined and the date of a possible introduction has not been set.

In order to get users excited about central bank digital currency, an attractive product offering with clear user benefits must be created. Provided a digital euro can assert itself in the market, there will be a change in the users' payment behaviour towards central bank digital currency. This has an impact on banks, payment service providers and other financial service providers, among others. The active involvement of the private sector in the creation of the digital euro is a positive signal and has advantages for all involved: the ECB uses external expertise to ensure effective and economical implementation. The private sector is proactively involved and participates in the success of the digital euro, while it can be assumed that the user benefits from increased user-friendliness. At the beginning of 2024 the ECB took a major step in this direction and published calls for applications to conclude framework agreements with private sector providers as part of the preparatory phase. The objective of the tender is to find partners for the joint development of individual components of the digital euro, provided that the pending decision at EU level is in favour of the introduction of the digital euro. It will be exciting to see what interest US Internet giants, such as Amazon and Microsoft, show in a collaborating.

In contrast to the digital euro, the European Payments Initiative (EPI) has made much greater progress with the wero payment system. Both projects, EPI with wero and the ECB with the digital euro, track the common objective of strengthening the payment system in Europe and permitting it to continue to grow together. The year 2024 will provide further insights into the extent to which these two initiatives will interact again and whether they will compete, exist in parallel or even merge in the future.

It is difficult to make a forecast for the year that has just begun. What we can predict with great security, however, is that 2024 will be a groundbreaking year for the development of the digital euro and will polarise critics and fans alike. PPI will continue to follow the topic with interest and report on relevant developments.

Authors: Alois Brügge, Dennis Friemerding

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