At the end of June, the European Commission will deliver the first version of its legislative proposal on the digital euro, which the governing council of the European Central Bank should approve in October.

From that moment on, the ECB would give way to the next phase of development and pilot tests, while the institutional trio – European Council, Commission and Parliament – ​​began the legal process. Just in time so that, if nothing goes wrong, it is approved before the European elections in June 2024. With this calendar, it is expected that between 2026 and 2027 the new payment instrument would be accessible in the eurozone countries.

Understanding what the digital euro project is requires first saying what it is not: it is NOT a cryptocurrency. That being said, what will it be? A digital representation of the European fiat currency issued and backed by the ECB. It will therefore have the guarantee that gives the physical euro its value as a currency. It has been conceived with this attribute of credibility, in a world of increasing digitization in which new (and imaginative) unsupervised and unregulated instruments proliferate, some of them volatile and often criminal. To this extent, the digital euro is justified as an antidote to bitcoin and its imitators, which have sucked a share of the money supply.

The basic motivation, as defined by the first study launched in 2019, is none other than to facilitate the coexistence between ECB money and other existing or future means of payment. Without expressly saying so, the designers of the digital euro conceive it as a kind of “Bizum with a European scope [non-existent] but of a public nature”. What they do indicate nominally is that most of the electronic transactions expressed in euros are based on two means of payment, Visa and Mastercard, both of which are owned by US companies.

This is where the notion of sovereignty comes into play. According to Fabio Panetta, a member of the ECB council and spokesperson on this matter, “in order to safeguard financial stability, it is necessary for the money of the European central bank to be the heart of the system and for us to be in a position to offer citizens a means risk-free digital payment system that they can use for free anywhere in the eurozone”.

The digitization of economic activity has allowed different private means of payment to compete with cash, but the existence of a public alternative that, reciprocally, competes with them is desirable. A recurring buzz heralds the decline of cash: it is true that a digitized economy generates this trend, but it is also true that, in twenty-one years of circulation, ECB money has increased seven-fold to represent 1.6 trillion euros. The figure grows at a rate of 10% per year, while the dollar grows at 6.5% and the pound at 5.2%. Cash’s announced death doesn’t seem close.

However, cash is losing weight in retail transactions. It has fallen from 79% in 2016 to 59% in 2022, according to an ECB report. At the same time, the proportion of individuals who prefer to pay in cash has dropped from 32% to 22% in those six years. The digitization of society implies that all citizens have the right to pay digitally, but there is currently no single digital payment method that is accepted throughout the EU.

One risk of the spread of unsupervised payment instruments is that they could precipitate a fragmentation of the system. The digital euro is the solution, according to Panetta, because “it will provide financial intermediaries with a platform to develop and offer innovative services throughout the euro zone.”

When developing these services, banks and other entities could present them as their own, in accordance with their respective business models, but with a single foundation, the digital expression of the euro.

There is an element of branding in it. The euro is the single currency in 20 countries (plus others that, without being members of the EU, have adopted it). As a fiduciary unit it is the same, but in practice the only integration of the digital retail markets is that offered by two offshore companies, which is classified as a lack of the European construction model.

Another key point – and a source of controversy – is how the private banks called upon to distribute the digital euro will participate. And, by the way, how the commissions will be regulated. Technically, the distribution model is defined, which does not mean that it will satisfy everyone: banks and other intermediary entities will be in charge of recruiting users and providing a virtual wallet to those who meet the requirements (being European citizens or businesses or not). residents who have open accounts in a European bank) and are not suspected of money laundering, among others.

The format will be a digital wallet that will be loaded with an amount of euros to be determined; It has been developed within the ecosystem and will be made available to banks so that they can incorporate it into their app offer.

A white label model is planned for those who do not have the capacity or will to develop, but each bank will be able to identify its wallet as its own. Some have advanced their reluctance about the limit that could be stored in a purse: depending on the project, between 1,000 and 3,000 euros. It is not a trivial discussion, since the fewer euros, the better it will be for intermediaries.

How is it explained? The digital euro will be a means of payment, not a form of investment or savings. Unlike deposits, which are a liability of each bank on which it can offer credit, digital euros will be a liability of the ECB that each entity will assign to its client’s account. The bank will manage the application, but the money will not appear on your balance, so you will not be able to make any transactions with those euros. The ECB assumes that intermediaries could sharpen their inventiveness to develop value-added services on this means of payment. Theoretically, because at the moment the banks are concerned about something else: how they are going to be compensated for their role as distributors.

The ECB has taken the technical elaboration to a point of detail that leaves the political decisions to the EU institutions. One element that will give a lot of cloth to cut is data privacy, an issue that has given rise to the circulation of hoaxes about alleged hidden intentions in the European project. Panetta has responded in several interviews that “intermediaries, obviously, are obliged to comply with the lengthy European legislation on the custody of their clients’ data; As for the ECB, it will not collect or store more data than is strictly necessary for the system to work”.