Digital Euro: functionality and critical evaluation

Digital Euro: functionality and critical evaluation


The ECB presented an approximate concept of its ideas in the fall of 2020, and conducted a survey of European citizens and companies in early 2021. The results were published in April. More than 8000 responses were received, 95% of them were from individuals. The answers allow us to shed light on the strengths and weaknesses of the presented concept of an alternative to fiat funds.

What is digital money? The variety of terms used still confuses many people. The term cryptocurrency does not refer to the “digital euro”, although on a lot of tokens are listed. It is a “central bank digital currency” with the abbreviation CBDC.

Others talk about a programmable euro or a “digital form of cash.” The problem is that the basic term “digital money” is applied to all known forms of money in monetary aggregates from M1 to M3 (except cash), because they are already available in digital form. Therefore, many people have only vague ideas about what digital money can actually be.

Digital money as defined by the ECB

According to the ECB, digital money is a commitment of the Eurosystem that complements the previous two forms of money: cash and balance sheet money. Thus, there are elements of something very familiar in eEURO, namely the transferred obligations of the EU, in accordance with the law of obligations. What is new is that eEURO should be available to the broad masses of users as a commitment of central banks. It should be available “to the general public, including citizens and non-banking firms.”

Instruments with the function of saving, measuring value and means of payment are called money. When discussing digital money, it is often unclear whether it is primarily about money as a means of saving, or as a means of payment. Payments are flows, money is quantity.

When the ECB writes: “The analysis focuses on the design of the digital euro for use in retail transactions accessible to the general public,” then the importance of the payment aspect becomes very obvious. We are talking about improving payment transactions, which, based on a 100-year-old banking system, urgently need to be reformed.

Token-based Model, cryptocurrency, blockchain and distributed registry Technology

It is important to understand what the digital euro of the ECB is not. For FinTech, digital money means that it is stored in a blockchain, that is, a blockchain-based euro. But this is not the ECB’s intention. Some market participants equate eEURO with the term “token”. They also talk about its “tokenized model”.

In general, a token is a digital representation of value in the same way that a security could be described as a documentary representation of an obligation under law. The value can be a tangible asset, such as a share, a piece of land, precious metals, etc., or an obligation under the law of obligations.

Since the token is a set of digital data, it can be easily transmitted over electronic lines and, hopefully, simplify the trading of the presented values.

The ECB does not use the term token to refer to its money, but only for other meanings: “We use the term tokens to refer to representations of existing assets.” To date, the question of how to make the token system work has not been resolved.

As with the term “token”, the ECB does not use the popular term “cryptocurrency” for eEURO. The same applies to blockchain and distributed ledger technology (DLT). The ECB states that the digital euro does not necessarily have to be stored in a decentralized database in the form of DLT. Moreover, they declare that he will not use DLT.

Digital Euro design

An interesting question arises: how does the digital euro work, which should be suitable for innovative payment services? The ECB, like the Bank of England, has not yet presented the final picture. It is definitely possible to recognize only certain basic structures.

Account-based asset: The ECB names two forms in which eEURO can appear: account-based and bearer-based.

Account-based is an account-based solution. It represents the traditional balance of user accounts within the ECB. Each payment takes the form of the payer’s access to his or her EU account via suitable payment orders.

To bearer is a form – “digital euro to bearer”. Here there is a digital data record that has the property of a tool holder. This bearer document is a requirement to the central bank.

The ECB’s vision is to turn digital money into a full-fledged substitute for cash. To do this, it should be possible to digitally transfer an error-free data set, which is the equivalent of a euro, between any parties in an offline round-trip mode. This set of digital data represents the requirements for the Eurosystem regarding balance sheet money (i.e. crediting an account) in the same nominal amount.

The development of such tools for owners is still in its infancy. No one can imagine exactly what it should look like today in the final result. The ECB considers the related problems unresolved and even “not yet fully understood.”

Data storage

The ECB comments on the type of digital money storage in the chapter “Technical and organizational approaches”. He distinguishes between a centralized and a decentralized solution. In the case of a “centralized”, the data is stored “in the ledger of the central bank.

In the case of “decentralized”, which corresponds to the provision of “digital bearer eEURO”, the system will look like this: the ECB again stores the requirements of “bearers” in its own database. These requirements are then reflected in additional data records that represent a “bearer asset” from the point of view of the money holder and are available to users. Then they can be transferred from peer to peer – offline.

The ECB, of course, has no direct relation to this. Therefore, there should be some decentralization of responsibility for the security of data transmission and storage for end users. The regulator wants to reserve the right to determine the technologies that are used for this (for example, smart contracts, encryption, etc.).

For this purpose, a survey was created with the expected answers. Private individuals have agreed with technologies that are already reliably used today: cell phones, smart cards, smart watches. When it comes to software, mostly think about wallets in mobile phones. Respondents from the professional sector also offer chip systems in any “hardware devices”.


The marketing concept of the “programmable digital euro” has caused fantasies and has already initiated one or another pilot project. Programmability is designed to improve the ability to initiate payments or perform step-by-step transactions. The term “programmable” also gives the impression that virtual currencies must necessarily be associated with the property of programmability: the aspect of new forms of money is their programmability. But this is not the ECB’s point of view.

The programmability property is the result of innovations by the blockchain community, which managed to store small programs in the same block chain that also stored Bitcoin or other cryptocurrencies. Thus, money and execution programs were stored in a single database, which, as expected, could make payment processes faster, easier and safer. This means that anyone who talks about a programmable euro means money on the blockchain, which is enriched with smart contracts.

But even in the blockchain, cash reserves and programs are separate data sets. The fact that they are stored in the same database has both advantages and disadvantages, for example, if modifications are needed.

An example of well-known standing orders shows that it is not always necessary to package money and executable programs in the same database. Execution programs can be stored anywhere, they just need access to the payment system.


In fact, the virtual money of the Central Bank is created in the classic way of creating a loan. The ECB provides a loan to banks and either deposits an equivalent amount to the account (based on the account), or issues a bearer instrument (bearer). Alternatively, commercial banks serve the ECB with assets that it accepts as part of its open market policy, after which the Central Bank recognizes the deposit account of the offering bank, or issues a bearer instrument.

Individuals receive eEURO by transferring their bank deposits to their (future) account with the central bank. Third parties that meet certain criteria (controlled intermediaries) can provide additional services, such as “identification and connection of authorized users and, possibly, routing of transactions to the central bank infrastructure.” But most likely, all these difficulties will be eliminated, and the central bank will work directly with users.


From the point of view of the regulator, one of the strengths of eEURO is its security, since this is a requirement of the central bank. However, here central banks should carefully weigh how safe they really are.

Central banks select their assets according to various criteria and have a large volume of requirements for states whose readiness and solvency has not been proven. Private money systems, such as stablecoins, make it possible to carefully consider the composition of their portfolios. They are free from political considerations and obligations to control monetary policy. They cannot afford the reputation of having unsafe hedging portfolios. Consequently, it becomes clear why private stable monetary systems will one day be banned everywhere. They are considered safer than the money of central banks, and therefore represent a competitively unprofitable opponent.


As we know, the digital euro is still in development. But we should not forget that the World Bank has announced a plan to abandon fiat currencies, a process that should begin as early as 2022. And China, with its e-CNY and the DCEP payment system, claims to be the world currency.

We should not forget about Bitcoin and cryptocurrencies, which people do not intend to abandon.

Nevertheless, if central banks do not install their money and payment system, private global networks will do it.