The European Commission this week publish legislation on a digital euro, bringing the bloc's long-mooted plans to introduce such a currency a step closer to reality. On June 28 Mairead McGuinness, European Commissioner for Financial Stability, Financial Services and the Capital Markets Union, presented proposals to European governments and to the European Parliament on both the digital euro and a parallel law to protect the legal tender status of euro cash.

It's not the final step, though: Even if national governments and the European Parliament endorse the plans, the European Central Bank (ECB) will ultimately decide whether or not a digital euro will be issued. The ECB says it expects to make a final decision on the digital euro later this year sometime around October.

What is the digital euro?
A digital euro would exist alongside the existing euro as an additional form of online or electronic payment. McGuinness says the digital euro would be a "complement" to physical cash and the euro itself. It would be an exclusively digital or electronic form of the euro that could not be converted into cash. The key difference between a digital euro and an online transaction involving the euro is that payments made in digital euro could only be made electronically or digitally, whereas all standard online banking payments can theoretically be converted into cash.

Importantly, all euro and digital euro would be backed by the ECB. Users would likely be able to buy digital euro from their existing commercial banks and keep them in a separate account.

Why does the EU want this?
The rise of cryptocurrencies and other third-party payment systems have intensified debate around whether or not central banks should introduce their own digital currencies.

When Facebook announced in 2019 that it was planning its own virtual currency, some European policymakers worried it could eventually undermine the ECB.

In October 2020, the ECB launched a public consultation on establishing a digital euro and since July 2021, it has been looking at various design options and user requirements while trying to establish how a digital euro would actually work in practice.

The EU says such a currency could "support the Eurosystem's objectives by providing citizens with access to a safe form of money in the fast-changing digital world."

It also says that a digital euro could harness the technological benefits associated with other digital payment methods without the risk and instability that have been associated with others.

Is it really needed?
The EU appears keen on the project, but many critics say it is not needed. Markus Ferber, a spokesman for the European People's Party grouping in the European Parliament, said the legislation looks technically sound but "it does not answer the question: Why?"

Many say the steep fall in the value of cryptocurrencies over the past few years suggests the apparent threat they posed to central banks has passed. Banks themselves have been less than enthusiastic. The European Banking Federation has suggested that creating such a system could lead to bank runs, whereby people buy digital euro with their regular euro, as they will regard it as a safe haven in times of crisis.

With that in mind, it is believed the ECB is considering capping the amount of digital euro that can be held by an individual at around €3,000 ($3,280).


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