Overarching study into Digital Euro demands end-user focus

In addition to printing banknotes and minting coins, in a few years’ time, the European Central Bank (ECB) may only circulate euros that consist of unique digital codes and cannot therefore be held in the hand. This Digital Euro will then become a direct digital representation of physical money, enabling peer-to-peer transfers.

Beyond the technical aspects of the Digital Euro

But which digital technologies are best suited for such a Digital Euro? What are the security and privacy concerns? And how do you ensure that Europeans will actually use such a digital currency? Each of those questions focuses on a different aspect.

This is a typical development where it is important to look beyond the technical story. And that makes it a perfect fit for TNO Vector, where specialists delve into highly complex innovative initiatives and then translate them into what is needed in day-to-day practice to make them a success.

Dutch Central Bank (DNB) shows interest in report

Within TNO, however, research has already been carried out into the specific digital technologies that could play an important role if the countries of the EU do indeed decide to create a Digital Euro. But what was missing was an overarching study that identified multiple technologies and their social impacts.

This is why Abhishek Mahadevan Raju (scientist innovator at TNO) and David Otto (Innovation Strategy & Policy consultant at TNO Vector) decided to join forces last year. In the meantime, their study has been completed.

The Dutch Central Bank (DNB) showed immediate interest in their report: ‘DNB is exploring the development of a possible Digital Euro. It is valuable that other parties, such as TNO, are also carrying out independent research on this and contribute to the debate and development of this public system’, says Menno Broos, Digital Euro project leader at DNB.

End-user focus essential in successful Digital Euro introduction

The main recommendations? ‘When choosing the technical solutions needed, we really need to look closely at what that means for the end user’, Otto stresses.

‘After all, the way the infrastructure and transaction processes work not only directly impacts how user-friendly and secure a digital currency is, but also to what extent privacy can be guaranteed. This makes a focus on the end user essential for the successful introduction of the Digital Euro.’

Different approaches to digital currency

Another key issue: To what extent should the building blocks of the Digital Euro be centralised or decentralised? ‘When we analysed how different countries are currently developing their own digital currency, we saw that different approaches are possible in this area’, Raju explains.

Raju gives as an example: ‘China, for example, has very clearly adopted a centralised approach, which works well there. In Japan, on the other hand, they are currently working on a more decentralised approach, which is well suited to their country.

During our analysis, it quickly became clear that both central and decentralised approaches have their advantages and disadvantages. When developing a digital currency, we therefore need to look at each building block individually to determine which approach fits best.

This is another important recommendation we make in our report: Do not opt for a centralised or decentralised approach out of hand, but weigh up the pros and cons of each component and pay particular attention to the wishes and concerns of the end user when making your final choice.’

Decentralised approach seems best for the Digital Euro

‘In other words, a modular approach’, Raju continues. ‘It is good to be aware that here in Europe, a completely centralised approach is not an optimal solution. Within the EU, we are dealing not only with the ECB, but also with the central banks of all Member States and a number of independent industry stakeholders.

The latter group will play an important role in building and supporting the desired infrastructure, often being very specific about what they need and what is technologically required achieve their goals. This means that on that front, you can’t really escape a more decentralised approach.’

The Netherlands a pioneer in digital payments

The Netherlands is leading the way in digital payments. Otto: ‘Our country really is a pioneer in this field. Compared to other EU countries, relatively few cash payments take place here. This means the introduction of a Digital Euro in the Netherlands will likely be fairly smooth. But it also means that the use of such a digital currency could well lead to bottlenecks in other EU countries. Because for people who are not used to paying digitally, it can really be a really big step.’

Cash payments will remain possible

‘It is therefore good to know that the Digital Euro is not going to entirely replace the existing payment system. It will really be an addition’, Raju stresses.

‘If the Digital Euro is indeed introduced, EU residents will be able to continue to pay in cash if they want. The introduction will also be incremental in order to minimise the impact on the existing financial infrastructure.’

‘This is why EU citizens will initially only be allowed to have a limited number of Digital Euros in their bank accounts. It is being suggested to limit that amount to a maximum of 3,000 euros’, Otto knows.

‘Imagine a situation arising where people suddenly have a strong preference for Digital Euros. Thanks to this demarcation, it always involves a part of the financial system, so commercial banks cannot get into trouble because of it.’

When can we expect the Digital Euro?

At the moment, these are still future scenarios. However, preparations are already being made. Last November, after completing the research phase, the two-year preparatory phase started straight away. And pilot programmes are expected to start among consumers next year, in 2025.
There are then a number of further steps in European legislation, including the European Parliament, before the knot can really be tied and the way can be cleared for the introduction of a Digital Euro (or not).

Of course, we are keeping a close eye on all these developments. It is highly likely that many more recommendations will follow the advice in the recently released report.