Electronic payments in the EU reached €240 trillion in 2021. The Bank for International Settlements predicts that central banks representing one-fifth of the world’s population will likely issue digital currencies within the next three years.

To prepare the Euro for the future, the President of the European Central Bank, Christine Lagarde, envisions a digital euro as a digital form of cash that will be used for all digital payments, free of charge, available always and everywhere, and meets the highest standards of privacy.

It will coexist with physical cash since no one in Europe must be left behind. It is an outlook of development that brings to mind a proverb of the magisterial musician and painter Ms. Pat Bishop TC – none of us have crossed until the last one is on the other side. It is a style of leadership that is as eternal as it is inclusive and pure. The preparatory phase for a digital euro will last two years. It will begin on 1st November, 2023.

This phase does not signal a decision to issue a digital euro. Rather, it is a willingness to be wrong, to fail, to make errors, and to correct them before going to market. It is a period of experimentation during which the ECB will test and experiment to design a digital euro that meets the requirements for financial inclusion, privacy, environmental footprint, user needs, and user experience.

What the governing council finds appealing in the idea of a digital euro is that it will offer the Eurozone a real-time payment technology in central bank money. It will augment Europe’s autonomy from private digital payment providers, most of which are not domiciled in Europe. As the world prepares for the shift from Open Banking to Open Finance and citizens are increasingly paying for goods and services digitally, a digital euro would naturally increase the efficiency of European payments and buttress Europe’s strategic autonomy.

During this period, the ECB will finalize the digital euro rulebook, as well as examine possible providers that have the capability to develop the undergirding infrastructure for the central bank digital currency (CBDC). At this stage, the ECB’s concept includes a mode of distribution that involves users’ payment providers, or a digital euro App provided by the Eurosystem.

This means that the unbanked or those who do not have access to digital financial services would still be able to use the new digital currency. This might be made possible using a card issued by a public body and will allow the citizen to exchange digital euros for cash and vice versa at ATMs.

In October 2020, the Bahamas issued the Sand Dollar, becoming the world’s first country to create a digital version of its traditional currency. To use the Bahamas Sand Dollar, commercial entities and citizens must enrol with an authorized financial institution.

Their digital currency is then deposited in an eWallet that can be accessed using a mobile phone application or a physical card. There are no transaction fees for individuals, and the transaction records become a profile of income and expenses that can be used for micro-loan applications.

The Eurosystem would bear its own costs, including those related to scheme management and settlement processing, but the idea of a compensation model between intermediaries and merchants will provide an incentive for the digital euro to be propagated and distributed. However, this will require stringent guardrails against inflated service charges from merchants.

Part of the vision is for the digital euro to function like an online wallet that offers secure and cost-free electronic payment options. The digital euro will be guaranteed by the ECB. The ECB, commercial banks, and digital wallet service providers will manage the distribution. However, only residents of the EU area and their citizens abroad will have access to the digital euro.

CBDCs are comparable to—but not the same as—stablecoins. Some stablecoins are private, stabilized cryptocurrencies pegged to another currency, commodity, or financial instrument with the objective of maintaining a relatively stable value over time. Unlike cryptocurrencies, which are decentralized, CBDCs are state-issued and operated.

Bankers, regulators, scholars, and consumer groups fear that the new CBDC may provide only moderate improvement compared to existing accounts and may undermine the commercial banking sector. To address these concerns, the ECB plans to cap individual ownership of digital euros.

This measure aims to provide some measure of protection to the commercial banking sector while competing against credit card companies that are domiciled elsewhere. This decision by the ECB sets it apart from other central banks in the G7 nations. Several countries, including China, Sweden, and Nigeria, have already launched digital currencies or pilot projects.

As of June 2022, quite a few countries have officially launched their CBDCs. Nine of them were in the Caribbean—The Bahamas, Jamaica, and all the Eastern Caribbean Currency Union members, except Anguilla, which elected to conduct a pilot. Belize, Brazil, and Haiti are currently developing CBDCs.

Other countries are in the research phase of product development. The Bank of Canada is researching potential system designs and business models for a digital currency that, like a banknote, would be secure and accessible.