The Digital Euro: shaping the future while preserving trust

"As for the future, your task is not to foresee it, but to enable it."
Antoine de Saint-Exupéry, The Wisdom of the Sands (1948)

The future of money is not yet written but the draft is fairly well advanced (and I expect that to be a theme of Fabio Panetta’s – the Governor of Banca d’Italia – Whitaker Lecture at the Central Bank next week). The way we pay for goods and services is shifting rapidly, reflecting the broader digitalisation of our economy.  And although there remains inherent uncertainty as to where we might land, it’s also clear that it won’t be back to where we started from. The implications stretch beyond the financial system and the economy to  broader society and require incisive stewardship now. Money is, and always has been, based on trust: trust in the issuer, trust in the system, trust in the institutions that oversee it. This must endure, despite the rapid change.   

Central banks are responsible for the stability of the monetary system. Our role is to ensure that the foundations of the system remain, that it is safe and trusted, and that we cultivate an environment that can harness the benefits that innovation can bring while fostering inclusion, competition, and reliability that enhances public welfare.

So in this evolving context, central banks also need to keep pace and innovate. Achieving this requires some re-imagining of the monetary system. In practice, the two forms of money, central bank money and commercial bank money, are indistinguishable to people transacting in their daily lives, reflecting their trust in the system bound by the certainty that bank deposits are safe and can always be converted into cash.  Central bank or public money is only available to the public in the form of physical cash. It is highly visible, trusted and is probably the image that many people have when they picture "money". This two-tier monetary architecture, anchored by central bank money, has been in place for over 300 years.

However, the majority (more than 85%) of the money held by people in the euro area is not physical central bank or public money, but digital private money issued by commercial banks. In everyday use, the share of cash at physical point of sale fell from 72% to 52% in terms of volume and from 47% to 39% in terms of value between 2019 and 2024.¹

In more recent times, technological developments have facilitated the advancement of what could be considered alternative forms of money, with new digital assets emerging, from tokenised deposits to stablecoins. In principle, different forms of money can coexist serving different use cases.  (This isn’t new: in the (very) old days, "barter" was the day-to-day reality in transactions!)

These innovations will reshape payments systems, offering increased efficiency, transparency and accessibility. Moreover, and as we’re seeing already, new entities and business models will emerge and have the potential to reshape the structure of the financial sector.

The economic fundamentals, however, do not change. Novel technologies can also suffer from traditional risks although perhaps in less well-understood forms (such as liquidity mismatch, excessive leverage, spillovers, asset quality issues, and operational fragilities). The underlying dynamics of competition, innovation, productivity, risks and market failures are likely to remain. Such risk factors are exactly what we at the Central Bank address through our supervision and regulation of the banking sector, to ensure that money issued by regulated private banks can be used seamlessly in the day-to-day life of households and businesses across the economy.

If safely designed and supervised, a system encompassing new and different forms of money can coexist serving different use cases. The best way to guarantee the sound functioning of the evolving monetary system is to build appropriate guardrails guided by public policy objectives.

As we assess the evolution both of private sector money issuance and the growing digitalisation of our lives, we in the eurosystem (the ECB and the 20 – soon-to-be 21 – national central banks) have concluded that our own public, riskless central bank money must evolve too. The Central Bank's analysis of survey data shows that trust in the euro and in national central banks is positively associated with intentions to use the digital euro for day-to-day payments.² Our task is to ensure and reassure both markets and the public that central bank money remains available, safe and efficient in this new environment, and that it will continue to fulfil its role in serving as the foundation of trust in our currency. The digital euro will be that central bank money or, in effect, digital cash.

We are now laying the technical foundations for a digital euro which, following legislative approval, we expect to launch in 2029.

But cash will also continue to be available.  Our aim is for the digital euro to complement cash, reinforcing the resilience of public or central bank money.  In the rush to embrace a digital world, we should not underestimate the resilience and utility of cash.  As I said recently, amid a rapidly changing payments landscape, the Central Bank is committed to ensuring cash is readily available as a means of payment, a commitment supported by the Access to Cash legislation which has recently come into force (and on which we are publishing consultations today). Our plan is to carry the properties of cash into the digital age so it can also be used online and offline, in person-to-person transfers, and at the point-of-sale across the euro area. Ensuring that central bank money remains accessible preserving its role as the anchor of the monetary system, is an important safeguard that has underpinned stability.

The digital euro will ensure that everyone in the euro area can keep using a public, universally accepted, and trusted means of payment for day-to-day payments, both online and offline. It will be designed to be inclusive from the ground up (practical features will be supported by the digital euro app and customer support will be available); we don’t want anyone to be left behind as we move to an even more digital economy.

The digital euro would sit alongside private sector payment offerings increasing choice and supporting our National Payments Strategy. Our aim is to provide an open and interoperable pan-European payment system upon which private operators can compete and innovate. By design, the offline functionality would further build resilience (for example during internet or power outages which may disrupt the availability of online services provided by private institutions) as transactions would be settled directly between users. This also offers enhanced privacy.

And of course, the digital euro would also contribute to a stronger and more integrated Europe. Today’s payment infrastructure remains fragmented and dependent on a small number of non-European providers, reducing our autonomy in a more uncertain world. Moreover, wide adoption of non-Euro denominated stablecoins could also present risks to euro area macroeconomic stability hindering our ability to respond to shocks and maintain inflation at target. These are key vulnerabilities for the euro area and recent geopolitical trends have brought them into sharp focus. The need to have an open and interoperable pan-European payment "rail" to ensure the payment system can perform effectively and efficiency for the functioning of the economy is now more pressing.

To summarise: the digital euro would set the standards in the payments ecosystem that preserve public policy objectives, ensure smooth and cost-free cross-border payments across the euro area, provide a rail upon which the private sector could develop value-added and innovative services, and serve as a foundational infrastructure with the anchor of central bank money. Next year’s six-month Irish Presidency of the European Council (from July) will likely see a major step in the digital euro’s creation and in the modernisation of Europe’s payment systems.

Gabriel Makhlouf