The digital euro is coming but how will it be different from Revolut?

The European Central Bank (ECB) has this week given the green light to the next phase of planning for the introduction of a digital euro. Huge technical preparations and trials are already underway and will now accelerate. But so will the debate about whether the euro zone needs a digital version of the single currency.

A range of digital payment systems already exist, provided by banks and payment providers such as Visa, Mastercard and Revolut. The job for senior politicians and central bankers is to make the case for why an “official” digital currency is needed – one backed by the ECB itself and thus offering the same guarantee as physical banknotes and cash.

As well as the consumer issue, the ECB and Europe’s politicians also see the development of a euro zone payments system as a key issue for strategic autonomy – as opposed to relying on US-controlled platforms – and important for underpinning monetary policy. There is also the issue of having a place on a fast-developing pitch of digital payments, where other international central banks will also be playing.

How would a digital euro operate?

You would carry digital euros in a wallet on your smartphone – or have an account accessible via a smart card. The service would be free and would probably be provided by your bank. This would allow for purchases all over the euro area, offering an alternative channel to those currently provided by banks themselves or other payment providers.

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The idea is that the digital euro “wallet” would be for transactions – a “means of payment” in the jargon – rather than being somewhere to put your savings. To ensure that the new service did not “poach” funds from bank savings accounts, a limit would be put on the amount you could keep in your digital wallet. A limit of about €3,000 had previously been floated by the ECB but what level would be set remains open to debate. To make the service more relevant for an increasing number of transactions, there is an argument for increasing this figures somewhat, though the banking sector is also warning of that cash being attracted away from bank accounts could have an impact on the ability of banks to lend. The limit on digital euro wallets is thus a key decision – too low and it will put off punters, too high and it may risk attracting significant deposits from banks.

Consumers would also be able to make what are called “offline” payments, tranferring money to somebody else’s digital wallet, as happens currently with services such as Revolut, and would be able use the digital euro for online shopping. As payments technology advances, other functionality may also emerge.

How exactly all this will operate and how it will link in with existing bank services remains to be worked out and will be the subject of discussions and tests, with the banking and payments sector now in the next phase of planning, which the ECB expects could last around two years. But banks would be likely to offer the digital euro wallet alongside their existing regime, including the ability to transfer cash from an existing bank account. An unanswered question is who will pay. The digital euro will be provided free of charge, but will taxpayers fund its development and provision?

What are the advantages for the public?

This is where the ECB and politicians have some work to do, with a significant campaign from the euro zone’s central banks likely to get underway on this issue. The core messages would be convenience and safety. The digital euro, like cash, would be acceptable, by law, all over the euro zone. And, unlike services offered by banks and payment companies, it would carry the full guarantee of the ECB – again like cash – and, if it is to work, a stable payment platform controlled by the public sector, rather than private firms.

With existing smartphone and payment cards generally acceptable across Europe, albeit not everywhere, and usually operating in a stable fashion, the question for the public is what more the digital euro can offer, or whether it can offer key advantages which will encourage consumers to use it for specific things – for example travel – in tandem with existing payment systems. This will come down to the ECB selling its message of the advantages of using ECB-backed digital money, as well as the technical functionality of the whole digital euro offering.

The initial driver for central banks to develop so-called CBDCs – central bank digital currencies – was in part the threat that companies such as Facebook would take control of important parts of the payments system. While Facebook’s own plan never progressed, the huge move to digital payments systems, which accelerated through the pandemic, meant central banks have generally pushed ahead with plans to launch. The stability of the digital euro, compared to crypto currencies, will also be a selling point.

Why do some people oppose the digital euro?

The main objections to the digital euro rest on privacy concerns. Campaigners warn that the ECB will have access to information on where people spend money and some have even raised concerns about so-called “programmable money”, in other words the central bank putting limits or imposing rules on how or where people spend. While some of these Big Brother concerns seem overplayed, there is no doubt that privacy is an important issue that has caused a slowdown in draft legislation on the issue published by the European Commission and under the direction of financial services commissioner Mairead McGuinness.

The key point here is balancing controls against terrorism and money laundering with the need for privacy. The ECB says it has no interest in keeping records of where people spend. However, some backstop is needed – as with normal banking services – to allow official access under certain prescribed conditions. While people are often happy to share all kinds of information with social media companies and, indirectly with banks and payment firms, this issue of where the line is drawn with the digital euro looks set to be a hot-button topic, not only in Europe, but internationally.

The EU’s data protection watchdog, the European Data Protection Board, in comments on the draft legislation, recently called for clearer and more transparent procedures in terms of data privacy when people sign up for their digital euro wallet. It says the public need to be happy about how their data would be used – and anonymised. It also called for more clarity on when authorities would be allowed access to information to combat terrorism and money laundering. And in particular it argued that a ceiling needs to be set for online transactions, under which the authorities would under no circumstances be able to access information. A €5 transaction, for example, is hardly likely to be funding terrorism or laundering money. It has already been indicated that this will be the case for offline transactions between two people.

When will the digital euro be launched?

The clear impression now is that the project has been slowed a bit. The ECB has the final say and previously president Christine Lagarde had indicated that it might be launched in 2025/26. Now the indications are that it will more likely happen be in around five to seven years’ time.

EU commissioner McGuiness has said that the legislation is now an issue for the next commission, which will take office next year after the summer’s European Parliament elections. The Eurogroup of euro zone finance ministers, chaired by Paschal Donohoe, has discussed the issue in detail, driving the political response. But the EU’s legislative programme will generally grind to a halt early next year in the run-up to the elections.

While the ECB has the final say on the launch of the digital euro, it has said that its technical work will run in tandem with the legislative and political agenda. The signs are that the central bank sees this as a strategic priority, but that work remains before the final decision to launch is taken. But with the use of digital payments becoming more and more common, the betting is that the digital euro will, sooner or later, become a reality.