The main question is not why there should be a digital euro, but how?

How can we make the digital euro useful? How can we address citizens’ needs? How can we address citizen adoption challenges? How can we make the digital euro popular?

We all share the ECB’s goals: financial innovation, strategic autonomy and a public monetary anchor in the digital world. It is normal and legitimate that the ECB should try to achieve these goals.

So how can the digital euro be made to work?

It must be simple from the start. The digital euro report drafted by the Centre for European Policy Studies (CEPS) recommends: “Start with a digital euro that is as simple as possible and with basic functionalities”. I agree the focus should be basic utility for consumers and then phasing-in additional services according to need.

However, to secure citizen uptake, I think we also need to clarify what the use-cases are. Ask anyone about the digital euro. They’re likely to answer: “How is that different from my credit card?”

As efficient private solutions have already been adopted, the digital euro would overlap and not fill any gap. Also, let’s not forget the value that people place on convenience and continuity.

It must be integrated with banks’ own solutions. As of today, people have properly adopted banking apps, through which they do a large proportion of their banking. Adding the digital euro to this framework would only help its uptake. This means banks need to oversee front-end and back-end systems.

The digital euro must offer a high level of privacy. In the 2021 survey conducted by the ECB (Report on the public consultation on a digital euro, 14 April 2021), privacy came first with 43% of respondents saying it’s what they wanted the most from a digital currency. The European Data Protection Board made recommendations (Joint Opinion on the Proposal for a Regulation on the establishment of the digital euro, 18 October 2023) on this aspect, underlining the need for improvement.

We need to focus on simplicity, use-cases, integration in the current landscape and privacy.

Online, offline, account-based, wallet based, how can we best answer needs?

To me, users’ needs are not so clear-cut. Offline payments are where I see the most added value for peer-to-peer and day to-day payments, and the closest we can come to replicating cash. Offline is also the solution that offers users the most privacy. However, despite being the most innovative, the offline functionality is the least attractive for the respondents of the 2021 ECB survey – with only 8% saying it’s what they favoured the most.

The online aspect is key to ensuring a presence in the digital world, for instance for e-commerce. Here, the challenge is that it would overlap with well-established private solutions. It would need to be better integrated in the current payment landscape.

On whether it’s account-based or wallet-based, I think what matters most is the underlying technology. If it’s token based, then the device on which the tokens are stored needs to be sufficiently secure. If it’s account-based, we need to think about connection to databases for transaction updates and instant accounting systems. Each solution comes with specific challenges.

How can we build a robust business model for the digital euro? How can we avoid reinventing the wheel and not duplicate existing payment infrastructure in order to reduce the additional costs?

To be robust, the business model needs to be balanced between incentives and obligations for all payment-chain actors.

The forecast model would involve a deficit for banks and other PSPs since it is supposed to be free for users and offered at a better price than card payments for shops, while high costs are behind it. To give a non-exhaustive idea, commercial account keepers would bear the costs of AML, KYC and reimbursing clients for fraudulent transactions. PSPs providing wallets would need to integrate the D€ wallet in the app, deal with transaction data and develop a suitable off-balance sheet accounting system.

The model would be better balanced if the reverse waterfall system is remunerated. Otherwise, third-party wallet providers would offer the wallet without having to deal with the linked bank account and receive all the interchange fees. Commercial banks, responsible for the account, would still be faced with most of the costs. This would create a strong windfall effect in favour of the GAFAM wallet-providers.

To remedy this situation, the business model would need to introduce interchange fees between the bank and the thirdparty wallet provider, in what could be called a two-level interchange system, the second level being the compensation between the intermediary wallet provider and the commercial bank holding the account. Wallet providers could also be made responsible for other costs, including fraud.

Adapting and using the ATM system for the digital euro would also mean costs requiring compensation from third-party wallet providers.

Clarity, balance and fees between wallet providers and commercial account holders would be a sensible way forward.

How may the digital euro contribute to the EU’s strategic autonomy?

I understand the concerns with strategic autonomy as other jurisdictions are developing CBDCs, private companies are developing stablecoins and a number of foreign companies are seen as having a privileged position due to their market share.

I think there are three aspects to consider when it comes to the strategic autonomy claims behind the digital euro. Firstly, are central banks around the world moving forward that fast with their own CBDCs? In countries like China, CBDC uptake has been relatively low compared to private methods. As for relations with Visa and Mastercard, I note that there are national card schemes, like CB, that do not depend on them. The issue is cross-border payments, but the EPI project is also a way to provide interconnection and fulfil needs.

In addition, as the business model is linked with high costs for European banks, the digital euro may limit the means for innovation, with a potential shift in favour of big techs.

Finally, disintermediation and disruption to the EU banking sector would also pose a threat to the EU’s strategic autonomy, of which the banking sector is a major enabler. Indeed, it supports the green and digital transition, industry and all key sectors in our bank-financed economy. So, for the D€ to contribute to the EU’s strategic autonomy, we must find a way to build on synergies.

How can we avoid bank disintermediation (financing of the economy, payments)?

Disintermediation is bound to have a significant impact, since bank funding would need to be replaced at a cost, thereby impacting lending channels, cost and availability of credit, and affecting the financing of the economy. Costs would be higher for consumers, citizens and businesses. To avoid this, I recommend integrating the digital euro into bank-provided solutions such as apps. As I have mentioned, this would only help CBDC uptake and create added value for users since banks would be able to add on services.

Then, a holding limit is an absolute necessity, and wouldn’t stand in the way of the digital euro. Online payments would be covered by the waterfall and reverse waterfall system, so holdings are not needed. When you use a credit card, you do not need to provision a specific account or dedicate a sum to it. It is linked to your bank account. It should be the same for the digital euro with the waterfall system. For offline payments, a very low limit would work if, like cash, the digital euro is expected to be used for small payments. According to the ECB 2022 Space 2 study, four out of five purchases at the point of sale for less than €5 were paid in cash. Above €50, cards become the most common payment method.

Finally, the digital euro should not be remunerated, to avoid public-private competition for deposits.

How can we limit the risk of financial instability entailed by the digital euro?

The threat of financial stability is central and needs to be mitigated.

Financial instability would come with deposit outflows. Users might be tempted to transfer funds from their commercial deposit accounts to digital euros. According to a Copenhagen Economics’ study for the European Banking Federation, a holding limit of €3,000, with a 100% uptake, may lead to an outflow of up to €739bn from bank deposits, or 10% of the total household deposit base.

High digital euro demand is a condition of deposit outflows. Yet, some factors could lead to this scenario. Times of stress, market instability, whether perceived or real, could be a trigger, thereby exacerbating outflows, intensifying bank runs and contagion effects. Especially if you can transfer funds to your digital euro account very quickly, at close to no cost, and with a high threshold. Meanwhile, co-legislators are discussing how to prevent contagion risk in the event of bank failure via another piece of legislation, CMDI.

To limit the outflow risk, I stress that the holding limit needs to be much lower than €3,000 and the digital euro cannot be remunerated, as rightfully proposed in the Commission’s draft regulation. It is not in the spirit of replicating cash and is bound to have a detrimental impact.