Digital Euro: what we already know

Financial revolution, or a complex challenge? This is what is already known about Euro Digital.

On the one hand, efficient transactions, financial inclusion and technological development. On the other hand, concerns about privacy, cybersecurity and the impact on financial stability. The switch to the digital euro is progressing, and the opinions of expert and the general public are mixed. This is what we already know about the digital euro.

What is "digital euro”?

The digital euro is a digital, secure and efficient alternative to traditional physical money and cryptocurrencies that is still being developed. Although other mechanisms may be used, the digital euro will be issued and regulated by the European Central Bank, and the currency distribution functions may be carried out directly (between the ECB and consumers) or indirectly (between the ECB and commercial banks, and subsequently between them and consumers), giving it the same legal status as physical notes and coins. This new means of payment is not intended to replace the physical euro, but to give people an additional means of payment.

The need for a solution like the digital euro is clear. The data clearly shows that consumers prefer convenient, fast and secure digital transactions, which are expected to grow significantly from 2023.

Source: Statista

In addition, the emergence and growing popularity of decentralised digital currencies, such as bitcoin and other cryptocurrencies, has also attracted the attention of governments and financial authorities. The introduction of the digital euro seems to be a response to this development in consumer habits and the need to modernise payment infrastructures. But what are the pros and cons of this solution?

What are the benefits of the digital euro?

The euro digital can bring several benefits, the most important being:

Digital payments and transactions

The digital euro could be used as a form of digital payment, paving the way for fast and secure transactions. This currency could facilitate electronic payments, online shopping and make international money transfers more efficient through the use of smartphones or computers, without the need for physical cash.

Financial inclusion

The digital euro has the potential to allow anyone, regardless of their geographical location or economic situation, to make a digital transaction. All they need is an internet connection and an electronic device. It’s about providing access to digital financial services to communities that lack them, thus helping more people get involved in the economy.

Financial stability

Depending on its characteristics, the digital euro could provide the European Central Bank with new tools to govern monetary policy. For example, it could help to combat illegal activities such as money laundering, tax evasion and the financing of crime by improving the traceability of transactions and ensuring greater compliance with the law.

New financial services

A digital currency issued by the central bank could have the potential to offer new financial services, such as peer-to-peer payments, smart contracts and access to financial services for communities without access to traditional banking services.

What are the limitations of Euro Digital?

Although the digital euro can bring benefits, there are a number of limitations to be taken into account that make this debate rather complex.

Infrastructure

The implementation of the digital euro would require a robust, scalable and secure technological infrastructure capable of handling large volumes of transactions in real time. The cost of setting up such an infrastructure would be high. In addition, the introduction of this currency would need to be widely accepted by businesses, traders and consumers, and may require a significant effort in terms of awareness raising and financial education.

Date security and protection

The implementation of the digital euro poses challenges regarding digital security and the protection of personal data. A digital infrastructure must be designed and constantly updated to ensure the security of transactions and prevent unauthorised access to the currency and user. Moreover, it is necessary to strike a balance between privacy and the need to detect illegal activities.

Digital exclusion and accessibility

While the digital euro can promote financial inclusion, there is another side to the argument that needs to be considered. Not everyone has easy access to technology or sufficient knowledge to use a digital currency. Users who do not have access to electronic devices or are not sufficiently familiar with the technology could be excluded. Therefore, implementation requires measures to include all citizens.

Technology dependence and service interruptions

The implementation of the digital euro is necessarily dependent on technology, which also carries risks. Advanced security measures and contingency plans will be needed, but the whole current "ecosystem” of digital currencies already provides for many of the risks associated with their use.

Cooperation in the euro area

The introduction of the digital euro would face significant challenges related to complex regulatory and governance issues. It would require a considerable effort of coordination and cooperation between euro area countries to put in place specific laws and regulations to address critical and sensitive issues such as security, privacy and consumer protection.

When will the digital euro be implemented?

The European Central Bank (ECB) launched a public consultation in 2020 to gather views on the creation of a digital euro currency. This consultation involved citizens, financial institutions and other organisations to assess the technical, operational and political aspects of introducing what would become known as the digital euro.

A date for the arrival of the digital euro has not yet been set. Factors such as security, transaction efficiency, data protection and the potential impact on monetary policy and financial stability are still being considered. A trial period will then be needed to test the technical feasibility, so the digital euro is not expected to be introduced before 2026.

Digital Euro: how is it connected to the investment world?

Although the digital euro is mainly used as a means of payment and not as a financial investment instrument, this digital currency can have an impact on investors.

Tokenisation of assets

The introduction of a digital euro could pave the way for the tokenisation of financial assets, where bonds, shares, real estate or commodities are represented as a digital token on a blockchain. Investors could buy and trade these tokens, making it easier to access a variety of assets and potentially increasing market liquidity.

Smart contracts

The digital euro, based on blockchain technology, could be integrated into smart contracts. For example, For example, it could be used to create and automate derivative financial instruments or forward payments. This could make investment processes more efficient, transparent and automated.

Decentralised finance (DeFi)

The introduction of the digital euro could boost the development of decentralised financial markets (DeFi) in the euro area. DeFi protocols are based on blockchain technology, which enables direct financial transactions without intermediaries. The combination of the digital euro and DeFi technology could clear the way to the creation of decentralised platforms for loans, savings, trading in financial derivatives, and other financial activities.

One step ahead with Banco Carregosa

As the digital euro is being studied by international experts, Banco Carregosa is keeping a close eye on technological and financial developments. It is important to understand all the implications of this new paradigm. You can rely on our team of advisors to provide you with personalised advice, clear up any doubts, and explore the opportunities.