ECB says restoring cash’s role requires a digital euro

The European Central Bank (ECB) has underlined the necessity for a digital euro to preserve cash’s central role in the rising digital economy.

As per a speech by ECB Executive Board Member Piero Cipollone at the France Payments Forum, he argued that with individuals entering into digital payments and online businesses increasing, the use of physical cash as a universal payment instrument is declining. The ECB views a digital euro as a crucial step toward replacing physical cash with a digital counterpart.

Current European payment sector shows critical dependencies

The European payment system is at present suffering from a number of challenges. The ECB referred to a widespread reliance on non-European payment service providers. Cipollone estimated that close to two-thirds of card payments in the euro area are handled by non-European firms. However, 13 euro area countries are entirely reliant on international card schemes or mobile platforms for point-of-sale transactions.

Even in nations with national card schemes they must be co-branded with international card schemes in order to enable cross-border eurozone purchases or internet transactions. Foreign players such as PayPal, Apple Pay, and Alipay are the leaders in digital payment solutions and are likely to collaborate with international card schemes in a bid to increase their market share.

Cipollone actually cited that “PayPal said that it will begin to accept contactless payments in Germany, with Mastercard technology.” This reliance reaches into the future. The ECB was also worried about future uses of overseas stablecoins.

The central bank lists three core challenges facing European payments. This involves having strategic autonomy and monetary sovereignty in a period of increased geopolitical tensions, bridging a competitiveness and innovation gap that is to blame for the lack of an international payment card scheme based in Europe, and enhancing a dispersed user experience for Europeans.

Digital euro design aims to complement cash

The ECB emphasized that the digital euro is a direct complement to physical cash. According to Cipollone, the digital euro would be legal tender. This will ensure that it is accepted wherever digital payments are available.

A key feature of the proposed digital euro would be offline functionality. This offers users privacy similar to cash payments and allows transactions even without network connectivity. The ECB emphasizes that the digital euro would provide European consumers with a simple, safe digital payment option that would be free for basic use and cover all payment needs throughout the euro area.

Public interest in a digital euro appears to be growing. Cipollone noted that “surveys show that close to half of respondents would be likely to use the digital euro – a number that has significantly increased over time.” This trend has been confirmed by multiple surveys conducted by national central banks.

The ECB emphasizes that the digital euro will be built on a strong public-private collaboration. This would enable private projects to scale across the eurozone, with domestic card payment systems potentially co-branding with the digital euro to broaden their appeal. Banks might incorporate the digital euro into their wallets and internet banking services as an alternative payment mechanism approved throughout the eurozone.

Already, approximately 70 merchants, fintech companies, startups, banks, and other payment service providers have joined the ECB in exploring the digital euro’s potential through innovation partnerships.

Central bank money needed for DLT transactions

Beyond retail payments, the ECB is also advancing its work on facilitating wholesale financial transactions using distributed ledger technology (DLT) and tokenization. Cipollone highlighted that the central bank already offers digital central bank money for wholesale transactions through its TARGET Services.

The ECB sees DLT and tokenization as approaches that enable assets to be issued or represented in the form of digital tokens rather than incremental improvements. This would enable market participants to manage trading, settlement, and custody on a single platform that is available around the clock every day of the year. It would also allow for the synchronization of trading and settlement processes, as well as the creation of new business models via automated conditional transactions.

European banks are also actively looking into this market, with more than 60% considering or already using DLT and 22% having DLT applications in place. Cipollone observed increasingly substantial securities issuances on DLT platforms.

Over the last year, the Eurosystem considered using DLT to settle large-value transactions in central bank money. Cipollone underlined that making central bank money available to these new technologies is very important in order not to let alternative settlement assets like stablecoins or tokenized deposits in. The ECB has said that it will provide a facility to settle transactions in DLT using central bank money in the near term. It will also seek more integrated solutions in the future.