How the digital euro could transform European financial services

Nick Root
9 mins

  • Thought leadership

The EU has an impressive history of driving innovation through policy and regulation. Both PSDII and GDPR were truly radical when they were first proposed. In many ways they still are.

However, the below quote from the ECB Digital Euro white paper, might just be the most shocking thing I've ever read in a policy paper.

Users could access the digital euro either directly or through supervised intermediaries. If users have direct access, the central bank would need to provide end user-facing services, such as customer identification and support. This would not be necessary if users access the digital euro indirectly, i.e. through intermediaries responsible for the provision of such services.

So what is the big deal?

The ECB, the European Central Bank that is responsible for setting policy and regulatory standards, is effectively saying that they are considering entering the retail banking market.

It's really hard to over-exaggerate the significance of that idea. It's directly comparable to the Bank of England or the Fed opening up high street branches and directly competing with commercial banks, at the same time as setting the rules for those banks.

Of course, this is just a white paper and the public consultation has just recently closed, so the ECB were just looking for early feedback, but when you read the paper, you certainly get the feeling that their minds have already been made up.

They try to alleviate concerns elsewhere in the paper, saying:

Some digital euro design options could affect the intermediation function of banks and their funding costs, especially in situations of stress.

Yes they certainly could. The digital euro could make banks obsolete. Perhaps in part to try to avoid all out panic, they go further on this:

For instance, the central bank might mitigate potential effects on the banking sector, financial stability and the transmission of monetary policy by remunerating digital euro holdings at a variable rate over time, possibly using a tiered remuneration system, or by limiting the quantity of digital euro that users can hold and/or transact.

I guess the feedback was fairly robust, because as I was writing this Fabio Panetta, Member of the Executive Board of the ECB used a speech to go one step further than the white paper, by suggesting a 3,000 EUR cap on the amount anyone could hold without penalty.

Whatever mechanisms they decide on, they need a solution to the banking issue because interoperability with regular euros is absolutely key for public take up. If the digital euro is not fully exchangeable with regular euros then the ECB is going to have to explain to the public the difference between e-money, bank deposits and CBDCs to avoid mass confusion.

What about technology?

Understandably the ECB has been quite tight lipped on tech, instead focussing on gathering feedback that might impact those decisions. But we can perhaps glean some insight from our own regulatory jurisdiction, Sweden.

Riksbank, the Swedish central bank and something of a historical innovator in the space,  has been working on the ‘e-krona’ for some time and is a little ahead of the ECB in this respect. They published this paper to discuss their findings on the tech choices.

They review the main design choices that any CBDC architect will face: token-based vs account-based. Interestingly they conclude that it doesn't really matter, since to avoid the double spend problem, there will be some sort of remote ledger where information can be tracked.

As all CBDC payments involve a remote ledger, no CBDC can be genuinely peer-to- peer, offline and anonymous like cash. CBDCs can still be somewhat peer-to-peer, somewhat offline and somewhat anonymous, but we see no major difference between token- and account-based CBDCs in terms of the degree to which they can deliver these properties.

Despite this, they comment that token based systems are the flavour of the month for central bankers:

The default CBDC technology approach among many central banks seems to be token based. For instance, King and Rachel (2020) report that among the 46 central banks in their survey, 58 percent focus their research on “a token model”. Furthermore, commentators and researchers – some affiliated with central banks – argue that CBDCs ought to be token-based (see e.g. Kahn and Rivadeneyra (2020))

Assuming solutions are found to both the above mentioned market and tech challenges, let's have a look at five interesting themes of change that this exciting idea could potentially bring:

Programmable Euros

The big disappointment for me was the lack of discussion around programmability and smart contracts: the most exciting part of this discussion in my opinion. The report does say a digital euro must offer the best available technology to meet the markets’ need for “programmability”, but that's it.

Money 1.0 was invented to solve the coincidence of wants problem. Money 2.0 will be able to incentivise cooperation. This is because money can now behave like software, and software is universal... meaning it can be programmed and used in unlimited ways.

The ability to program money seems subtle, but small changes to the rules of money can have large effects on the behaviour of the holders of that money. For a historical example of primitive money software influencing a population, see The Wörgl Experiment, where the small town of Wörgl in Austria successfully experimented with its own local currency to help get its population back to work in 1932. For a modern example, consider how bitcoin incentivised thousands of market participants around the world to mine it.

Having said all this, just by definition, this kind of technology (at least right now) is needed for large ticket items, for example escrow accounts that execute without lawyers. It hardly seems worthwhile for small stuff, and in the light of Fabio Panetta’s 3,000 max holding suggestion, programmability just might not be top priority for the ECB.

Monetary policy

Here is something that certainly should be a top priority for the ECB. Regardless of where you sit on the ECB's monetary policy, you cannot deny that a digital euro would vastly improve its effectiveness.

Monetary policy has always had a major problem. You can print all the money you like and make it as cheap as it can be (free), but you still need the private banks to actually choose to lend it. For them it's a commercial decision based on P&L, which is often not aligned with the greater good of society.

As we have seen, time and time again, the banks tend to have sticky fingers and the liquidity gets clogged up, and ends up inflating the prices of assets held by the rich rather than getting to the parts of the economy that need it.

Imagine if the ECB could put euros directly into the wallets of people that need it most, completely bypassing the banks and getting people spending. It would be a game-changing tool in the fight for financial stability, and a powerful tool in the fight against inequality.

I can understand why the ECB would want to play this down at this stage, given the market impact it would have on bank share prices, but given monetary policy is all out of options and inequality is out of control, I find it very hard to believe ECB claims that this is not the primary motivation of the whole project:

A possible role for the digital euro as a tool to strengthen monetary policy is not identified in this report, but could emerge in the future on the basis of further analysis or owing to developments in the international financial system.


Putting digital euros straight into people's wallets is a powerful tool for good, but it will certainly come at the cost of anonymity. The ECB is very clear on this point:

If the legal identity of digital euro users were not verified when they access services, any ensuing transaction would be essentially anonymous. While that is currently the case for banknotes and coins, regulations do not allow anonymity in electronic payments and the digital euro must in principle comply with such regulations (Requirement 10). Anonymity may have to be ruled out, not only because of legal obligations related to money laundering and terrorist financing, but also in order to limit the scope of users of the digital euro when necessary – for example to exclude some non-euro area users and prevent excessive capital flows (Requirement 13) or to avoid excessive use of the digital euro as a form of investment.

Money 1.0 is fungible, meaning it's totally interchangeable. If I lend you 10 EUR, you don't need to give me the same 10 EUR back, any 10 EUR would be fine. Money 2.0 has the potential to be non-fungible, because every digital euro will be 100% traceable. 

The taxman or anyone else with access to the ECB system can see exactly how much money you have at any moment, where you spend it and what you spend it on.

I personally don't think this is such a bad thing, especially given the EU’s focus and passion for privacy. But I'm guessing I'm in the minority on this one.

Serious US style lobbying 

Expect some serious lobbying from the most powerful duopoly the world has ever seen.

The night after this paper was released, Visa & MasterCard executives would have had wechat/Alipay QR code themed nightmares. Because when people in the EU can pay merchants for free using QR codes, their entire business model is under serious threat. 

Arguably you don’t even need digital euros for this. The SEPA instant rails that are already live, paired with the PSDII open banking protocols already make it possible to do instant bank to bank transfers. 

But this has not really taken off, especially at physical merchants because there are still some missing parts of the puzzle. For example, we are still missing a standardised QR code protocol: something that would probably come built into the digital euro infrastructure and maybe even be usable for regular electronic euros.

This massive threat won’t go unchallenged. Watch this space.

Worldwide EUR transactions

Currently if you want to wire euros to Singapore (for example) you need to initiate a SWIFT transaction. SWIFT is an old, slow, expensive payment network that the US controls. So there are some obvious reasons why this might not be ideal for the Europeans, particularly with how unpredictable the US has been in recent years.

The two last words of this quote in the paper caught my attention, and might potentially be a hint as to how this problem could get solved.

It would also contribute to its strategic autonomy by providing an alternative to foreign payment providers for fast and efficient payments in Europe and beyond.

Obviously limiting wallets to 3,000 EUR per person won’t help worldwide remittance but there is a situation where the ECB could remove this limit for B2B remittance, as long as the digital euro is converted back to regular euro eventually. 

This would mean you could move large amounts of euro around the world, in a very trackable and safe way, using an essentially free internet protocol.  

This I think would be a valuable play for the ECB given how little the euro is used outside of Europe, and the issues that it causes when trying to execute monetary policy, amongst other things.

All big exciting themes brought about by yet another big bold idea from the EU.