European central bank aims to launch digital euro for payments within five years

European Central Bank (ECB) policymaker Joachim Nagel believes it will be possible to use the digital € for payments within approximately five years. The ECB is launching the digital € by initiating a two-year ‘preparation phase’ starting November 1. During this phase, the ECB will finalize regulations, select private-sector partners, and conduct testing and experimentation. Following this phase, the ECB’s Governing Council will decide on the issuance and potential roll-out of the digital €.

The digital € will function similarly to online wallets or bank accounts, offering secure and cost-free electronic payment options. The ECB will guarantee the digital €, making it safer than private company alternatives. The ECB, commercial banks, and digital wallet providers will manage the distribution of the digital €. Only residents of the EU area and their citizens abroad will have access to the digital €.

Critics have expressed concerns about the project, including bankers, regulators, academics, the European Union’s privacy watchdog, and consumer groups. Some fear it will undermine the commercial banking sector and provide slight improvement compared to existing accounts. To address concerns, the ECB plans to cap individual ownership of digital euros, likely around 3,000 euros. This measure aims to prevent the depletion of the commercial banking sector while competing against dominant US credit card companies.

Why does it matter?

Electronic payments in the European Union have seen significant growth, reaching 240 trillion euros in 2021, accelerated by the COVID-19 pandemic. A survey conducted by the Bank for International Settlements suggests that central banks representing one-fifth of the world’s population will likely issue their digital currencies within the next three years. While the ECB’s recent decision sets them ahead of other central banks in the G7 nations, several countries, including China, Sweden, some Caribbean nations, and Nigeria, have already launched digital currencies or pilot projects. However, central banks such as the Federal Reserve, the Bank of England, and the Bank of Canada have adopted a more cautious approach.