The role of the digital euro in digital payments and finance

Contribution to Bancaria by Piero Cipollone, Member of the Executive Board of the ECB, based on remarks at the Crypto Asset Lab Conference on 17 January 2025

28 February 2025

Being a key player in digital payments and digital finance should be a priority for Europe.

As Mario Draghi pointed out in his recent report, the productivity gap between the United States and the European Union is mostly explained by technology and finance.^[1] If we take the information and communications technology (ICT) and financial sectors out, the gap disappears.

If we want to close the productivity gap with the United States, we need to focus on these areas. Digital payments and digital finance stand at the intersection of these two sectors. And they are developing fast, driven by changes in habits and technology. This is both an opportunity and a risk for Europe. It is an opportunity to close the gap by developing innovative and competitive European solutions. But if we do not seize that opportunity, we run the risk of weakening our competitiveness, resilience and strategic autonomy.

At the European Central Bank (ECB), as guardians of our single currency, the euro, we consider this a matter of crucial importance. Ultimately, it is about the future of our currency. Today, the euro is the second most important currency in the international monetary system. Its share across a range of indicators stands at around 20%, and the euro area accounts for around 12% of global GDP.^[2] If we want to prevent the euro from losing importance on the global stage, transacting and investing in euro needs to be seen as safe, easy and efficient, even as digitalisation transforms payments and finance.^[3]

Central bank money – the central pillar of the payments and financial system – has a key role to play in connecting the different parts of the financial system in a safe and risk-free way. This is particularly relevant in Europe, where payments and finance often remain fragmented along national lines, preventing us from fully reaping the benefits of the single European market. This is true for both retail and wholesale transactions.

For retail transactions – payments made on a daily basis by consumers and businesses – our reliance on non-European solutions weakens our strategic autonomy and is a drag on productivity growth. We should ask, for example, why we don’t have a European VISA or Mastercard. A digital euro – that is, central bank money in digital form for retail transactions – would give us the chance to increase efficiency, competition, innovation and resilience while allowing European private payment solutions to scale up and protect our monetary sovereignty.^[4]

For wholesale transactions – transactions between financial institutions – we need to avoid repeating the mistake we made in the retail sector and ensure that we provide the conditions for European actors to stay ahead of their competitors. New technologies offer us the opportunity to create an integrated European market for digital assets from the outset, in other words a European capital markets union.^[5]

A digital euro for everyday payments

For firms and households, central bank money is currently only available in the form of cash; there is currently no equivalent in digital form, which is becoming increasingly problematic because the use and acceptance of cash are declining. In the euro area, cash transactions have fallen below card transactions in value.^[6] The share of companies reporting that they do not accept cash has tripled over the last three years to 12%.^[7] The European Commission has put forward a legislative proposal to ensure the acceptance of cash^[8], and the ECB is committed to ensuring that cash remains as widely available and accessible as possible^[9]. Still, the trend towards cash being used less for daily transactions is likely to continue owing to the digitalisation of the economy in line with what has been observed in many advanced economies.

Day-to-day payments in the euro area by payment instrument, in value terms

(percentage of the value of all non-recurring day-to-day payments)

Current European digital payment solutions, such as cards issued by European payment schemes, mainly cater to national markets and specific use cases. To pay across European countries, consumers have to rely on a few non-European providers. More than two-thirds of card transactions in the euro area were settled through international payment schemes in the second half of 2023.^[10] And 13 out of 20 euro area countries rely entirely on non-European solutions in the absence of their own domestic payment scheme. But even those international payment solutions are not accepted everywhere and do not cover all key use cases.

National card schemes in the euro area

As a result, one of the key objectives of central bank money – to offer the public a means of payment backed by the sovereign authority that can be used for retail transactions across the entire currency area – is not being fulfilled in the digital space.

In addition, European payments have become a prime example of the situation that Enrico Letta and Mario Draghi described in their recent reports.^[11] The fragmentation of the market along national lines, the lack of European payment solutions available on a European scale and the difficulty faced by European payment service providers in keeping pace with technological advances mean that Europe is not competitive within its own market, let alone on a global scale.

Moreover, in an unstable geopolitical environment, we are being left to rely on companies based in other countries. In future, this dependency could extend beyond traditional payment service providers. Platforms like Ant Group’s Alipay have shown they know how to bridge geographical gaps: during major events like UEFA EURO 2024 they were able to boost their payment app usage among customers in Europe.

Merchants – and consumers, who bear the costs – are left to deal with the consequences of the international card schemes’ market dominance. To give just one example, the average net merchant service charges in the EU almost doubled between 2018 and 2022.^[12] This increase occurred despite regulatory efforts to contain it. And the cost falls disproportionately on smaller retailers, who face charges that are three to four times higher than those paid by their larger counterparts.^[13]

We must move swiftly to counter the risks stemming from Europe’s current inability to secure the integration and autonomy of its retail payment system. This is one of the key reasons behind the digital euro project: to bring central bank money into the digital age. Doing so would provide firms and households with a digital equivalent to banknotes and would strengthen our monetary sovereignty.

Benefits for consumers and merchants

Complementing banknotes, the digital euro would give all European citizens and firms the freedom to make and receive digital payments seamlessly.^[14]

The digital euro would provide a single, easy, secure and universally accepted public solution for digital payments in stores, online and from person to person. It would be available both online and offline, and would be free for basic use.

For merchants, the digital euro would provide seamless access to all European consumers. Moreover, it would offer an alternative that would increase competition, thereby lowering transaction costs in a more direct way than is possible through regulations and competition authorities.^[15]

Fostering competition and innovation in an integrated payments ecosystem

The digital euro would strengthen the euro area economy by fostering competition and innovation.

European payment service providers are finding it increasingly difficult to compete with international card schemes and mobile payment solutions. As the latter grow in popularity, banks risk falling behind not only in terms of interchange fees, but also in terms of client relationships and user data.

By contrast, the digital euro would ensure that payment service providers would continue to play a central role, thus enabling them to maintain customer relationships and be compensated for their services, as is currently the case.^[16] It would also offer an alternative to co-badging with international card schemes for cross-border payments in – and potentially beyond – the euro area, thus promoting competition.

The digital euro would also expand the opportunities available to payment service providers while reducing the cost of offering their own services on a European scale. In addition, it would foster an environment conducive to the widespread adoption of payment innovations throughout the euro area.

Currently, several innovations aimed at simplifying payments are emerging within specific national markets or across a few countries, driven by European payment service providers. Although these innovations are highly commendable and would enhance people’s lives, existing structural barriers are hampering their efforts to achieve pan-European scale.

These solutions are struggling to achieve the scale needed to provide a service to everyone in the euro area. This limits their ability to compete effectively with the large international players who can fully leverage economies of scale, even on a global level.

The European Commission’s legislative proposal^[17] foresees that the digital euro would have legal tender status; this implies that it would be accepted by all merchants who currently accept electronic payments. In reality this would equate to the creation of a pan-European network which could also be used by private solutions, thus overcoming the obstacles limiting their growth.

This would foster a more integrated European payments market. As private providers expand their geographical reach and diversify their product portfolios, they will benefit from cost efficiencies and be better positioned to compete internationally.

In essence, the network effects generated by a digital euro would function as a public good, benefiting both public and private initiatives. This approach would be akin to creating a unified European railway network or European energy grid, where various companies could competitively operate their own services and deliver added value to customers.

Instead of requiring significant investment to expand existing services across the euro area, the open digital euro standards would facilitate cost-effective standardisation, making it possible for private retail payment solution providers to launch new products and functionalities on a broader scale.

Ultimately, whether through the digital euro or private solutions, this framework would unlock innovation, create new business opportunities and improve consumer access to a diverse range of goods and services.

Making this vision a shared reality

The design of the digital euro, as well as the key provision in the regulation proposed by the European Commission, contains all the key elements required to make this vision a reality.

Over the past years, we have extensively engaged with a multitude of market stakeholders to establish the digital euro’s features. We have collected and discussed the input of representatives of consumers, merchants, banks and payment service providers. Furthermore, we are now looking at how the digital euro could be used to provide services currently not available on the market. To this end, we launched a call for expressions of interest, asking for collaboration from stakeholders, and we received a very strong response. Through this inclusive approach, we want to take everyone’s needs and perspectives into consideration to produce a robust payments solution.

The role of central bank money in developing a European market for digital assets

Currently, the ECB and the national central banks of those EU Member States whose currency is the euro (which we collectively refer to as the Eurosystem) offer central bank money in digital form to financial institutions through our TARGET Services: T2 settles more than 90% of the value of large payments between financial institutions, and T2S settles securities transactions. These services have been crucial in increasing the efficiency and integration of post-trade platforms in Europe.

We are committed to continuing to provide state-of-the-art settlement services in central bank money, even as new technologies emerge.

The potential of new technologies

In this respect, we recognise the potential of new technologies, such as distributed ledger technology (DLT), to transform and improve wholesale financial markets by enabling assets to be issued or represented in digital token form.

DLT allows market participants to handle trading, settlement and custody on the same platform, reducing credit risk, transaction failures and reconciliation needs. It can enhance efficiency by operating on a 24/7, 365 days a year basis and settling transactions instantly, which could potentially reduce annual infrastructure operational costs. A shared DLT platform could lower market entry barriers, enable small and medium-sized enterprises and new players to access capital markets and facilitate the efficient trading of financial instruments currently not covered on regulated markets.

We have an opportunity to create an integrated European capital market for digital assets from the outset – in other words, a digital capital markets union.^[18]

In fact, we have recently seen an upsurge in DLT initiatives in Europe. Over 60% of EU banks are exploring or using DLT, with 22% already implementing DLT applications. Furthermore, on the securities side, there has been an increasing number of issuances on DLT.

The role of central bank money and the Eurosystem’s exploratory work

The ECB is aware that it has a role to play in this work from the very beginning.

The availability of central bank money to settle transactions using these new technologies is important for two reasons. First, if we don’t use central bank money, other settlement assets – such as stablecoins or tokenised deposits – will be used, which would reintroduce credit risks and fragmentation in the financial system. And second, the possibility to settle in central bank money is seen by the market as a key factor in the adoption of new technologies.

The Eurosystem has already worked with the market to test settling wholesale transactions in central bank money using DLT. In exploratory work we carried out in 2024, for example, we offered three different solutions to link our TARGET services to market DLT platforms. This allowed industry participants to either settle real transactions in central bank money or conduct experiments with mock transactions.^[19]

This exploratory work stands out at the global level in terms of its scale and scope. Overall, 60 industry participants took part, including incumbents and new entrants. More than 40 experiments and trials covered a wide range of securities and payments use cases, including the first issuance of an EU sovereign bond using DLT. A total value of €1.6 billion was settled via trials over a six-month period, exceeding values settled in comparable initiatives in other jurisdictions.

Next steps

In the short term, the Eurosystem will aim to make it possible to settle DLT transactions in central bank money, with a view to enabling the further development of DLT on the market.^[20] The technological solution will be based on interoperability between market DLTs and the Eurosystem, but also – and this is crucial – between market platforms, based on strong and enforceable standards.

Looking further ahead, we will investigate how DLT can be used to create a more integrated financial market. With new technology, there is the opportunity to create a new ecosystem from scratch in a more integrated and harmonised manner. One way to achieve this integrated ecosystem in the longer term would be to move towards a European shared ledger. This would bring together token versions of central bank money, commercial bank money and other digital assets on a shared, programmable platform, on which market participants could provide their services. Another option could be the coordinated development of an ecosystem of fully interoperable technical solutions, which might better serve specific use cases and enable legacy and new solutions to coexist.

The trade-offs between the benefits of such flexibility and those of bringing everyone together on one platform need further analysis. We will reflect on these trade-offs and refine this long-term vision together with private and public sector stakeholders.

Conclusion

In the current fast-moving environment, Europe cannot stand still. If we do not bring central bank money into the digital age, we will hamper Europe’s competitiveness, resilience and strategic autonomy. And we will miss out on the opportunities that digital payments and digital finance offer. Others would reap the benefits instead.

By ensuring that central bank money keeps pace with digitalisation and new technologies, we would safeguard our monetary sovereignty. We would overcome fragmentation by offering money that can be used for any digital transactions in the euro area. We would foster competition and innovation. And we would strengthen our autonomy and resilience.