What is the digital euro and how does it work?
Here’s what you need to know about the virtual currency in the works at the European Central Bank.
6 min read
According to the European Central Bank, Europeans are relying more and more on digital payment methods. That’s why the EU is taking action to make sure people’s transition into cashless payment is as safe, smooth, and effective as possible. But while paying via card or even via smartphone might be becoming more common, a new form of totally cashless payment is on the rise: digital currency.Digital currency is a type of currency that exists primarily digitally rather than as physical cash, such a cryptocurrency. Approximately 50 central banks around the world are experimenting with or carrying out research on digital currencies. Some of the banks exploring CBDC (Central Bank Digital Currency) include the Riksbank of Sweden (with the E-krona) and the Central Bank of the Bahamas (with the Sand Dollar). Currently, China’s is currently leading the way in terms of national digital currency—the digital renminbi (e-CNY) is already being tested in some Chinese cities and is almost ready to be rolled out nation-wide.The EU has also seriously considered the idea of creating a digital currency—the digital euro—for the Eurozone. But what exactly is the digital euro and how does it work? Continue reading to find out everything you need to know about this potential new form of virtual money.The digital euro will become the CBDC of the Eurozone. It should operate like cryptocurrencies, or virtual currencies, but with some unique caveats. Essentially, the digital euro is a virtual currency that:In order to explain how the digital euro would work, let’s take a look at the most similar type of existing currencies: cryptocurrency and other virtual currencies. The Bank of Italy defines these as “digital representations of value that are created, used, and stored in electronic form.” In other words, cryptocurrencies:Not exactly. Like cryptocurrencies, the digital euro is a virtual asset. But unlike cryptocurrencies, which have no entity that creates and distributes them, the digital euro will be issued by the European Central Bank (ECB).In the way that it operates, however, the digital euro will be similar to cryptocurrencies like bitcoin in that:No, the digital euro won’t replace the physical euro. It’ll simply work alongside it to make payments even easier and more secure.The biggest difference is that the digital euro is real, digital cash. For this reason, its use won’t be tied to any intermediary banking institution. Unlike electronic payments, which are normally linked to the use of payment cards or to the intermediation of multiple banks, you won’t need to have a bank account to use the digital euro. When managing your money, making payments, or receiving refunds, you’ll have to use a digital wallet, similar to those used with cryptocurrencies.Why do we need a digital euro? The main goal of this new digital currency is to provide a modern payment tool for all private citizens and businesses in the Eurozone. Once it’s approved, the digital euro will enable simple and immediate payments, and money transactions that are completely digital.The advantages of this include:Of course, there are also some potential risks associated with the digital euro. Specifically, there are a number of issues that still need to be clarified:According to ECB President Christine Lagarde, implementing the digital euro will take up to 5 years. Before that happens, further discussions will need to take place on issues such as payment privacy and the actual role of the ECB in overseeing the operation of the digital euro. N26’s mission is to redefine the banking experience for its customers. This means adapting to the needs of an increasingly digital world. Never worry about visiting a physical branch, filling out paperwork, or any hidden fees. Our free N26 Standard current account comes with a virtual N26 Mastercard you can use right away to make digital payments online or in stores, straight from your smartphone. Or, upgrade to one of our premium accounts for even more benefits like innovative savings and budgeting tools, extensive insurance options and more. So, what are you waiting for? Find the account that’s right for you—open your account in minutes, from anywhere in the world.
What exactly is the digital euro?
- will have legal value guaranteed by the European Central Bank
- can be used alongside banknotes to make payments in the 19 countries in the Eurozone
- will provide a fast, secure and innovative payment method
- can be used by both businesses and private citizens.
How the digital euro and cryptocurrencies work?
- are created on the internet
- are not subject to issue, guarantee, or control of central banks or public authorities — they’re issued by private individuals
- allow for peer-to-peer transactions — money is exchanged instantly through special apps or digital platforms that don ’t necessarily require intermediation from a bank
- don’t have a connection with common legal tender currencies such as the euro (EUR) or the dollar (USD)
- are very volatile in value
Is the digital euro a cryptocurrency?
- it will be managed and regulated using blockchain technology.
- to use it, you’ll need to create a digital wallet, but you won’t have to open a bank account. In fact, the money can be deposited directly at the European Central Bank. This way, you can carry out peer-to-peer transactions without needing a commercial bank to act as an intermediary.
Will the digital euro substitute the physical euro?
What is the difference between payments made with the digital euro and electronic payments?
The advantages of having a digital euro
- Streamlining of processes—purchases and money transactions will become simpler and more immediate with the digitization of payments.
- Decrease in costs—costs associated with payment systems will be significantly reduced with the digital euro.
- Decreasing ecological footprints—the ecological footprint associated with monetary and payment systems would also be drastically reduced.
- Immediate support measures—governments could immediately provide economic aid to their citizens in times of need.
- Anti-money laundering—the registration of transactions would drastically reduce money laundering and tax evasion.
- Financial inclusion—allowing people without a bank account to use the digital euro will give everyone the opportunity to make simple and secure digital payments.
What risks are associated with the digital euro?
- Privacy—the digital euro would complement physical cash, which is an anonymous payment method by nature. Tracking payments with the digital euro would help with anti-money laundering regulations, but could place limits on the privacy of citizens.
- The role of banks—deposits to credit institutions could decrease, which could mean that banks will be less likely to offer loans. What’s more, with the increased use of the digital euro, credit institutions and other intermediaries involved in payments systems could be forced to at least partially revise their business models.
When will the digital euro launch?
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The digital euro is an electronic payment method that's currently being developed. Once it launches, you'll be able to use it anywhere in the eurozone.
The digital euro is expected to launch in 2025/2026.
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