The digital euro: balancing act of a CBDC

Ronald te Velde
Connective Payments

Table of Contents


Globally, central banks are considering the issuance of digital money. Just like cash, these CBDCs (Central Bank Digital Currency) should be made available to a wide audience. In the Bahamas and Nigeria, payment is already made with CBDCs. In most western countries the projects are still in the research phase. Pilots are already underway in some countries to test use cases. In any case, the question is no longer whether CBDCs will be introduced, but when and in what form. To help central banks in their decision making, the G7 published a set of guiding principles for CBDCs. (1)

At the end of last year, the European Central Bank (ECB) started an investigation into the possible introduction of a digital euro. To establish a legal basis for a digital euro, the European Commission (EC) has recently launched a public consultation.

The planning is that in 2026 the first digital euros will be used, both online and in brick-and-mortar stores. While the central bank issues these digital euros, they will be made available to the public through private participants, such as banks and fintechs.

A big question is whether CBDCs, and digital euros in particular, meet a manifest market demand. Research by both the ECB and DNB shows that consumers and businesses still know little about digital euros. The motivations for central banks to nevertheless invest heavily in CBDC are mainly macroeconomic in nature. General confidence in the monetary system is under pressure because with the decline of cash, it is increasingly in the hands of private participants. The Covid-19 pandemic and the explosive growth of cryptocurrencies and stablecoins in 2021 have further exacerbated that concern. Central banks see CBDC as a means of providing consumers and businesses with a stable alternative that is privacy-friendly and free from credit and liquidity risks. Furthermore, policy makers see the digital euro as a driver of further digitization and financial inclusiveness, especially in member states where more than half of POS payments are still made in cash.

There are still many uncertainties surrounding the issuance of CBDC. Perhaps the most important one is the unpredictability of the consumer. Are consumers going to actually use them, and how? What does this mean for the commercial banks, will they be able to provide sufficient credit in the future? Will a bank run potentially become much more destructive when bank balances can be converted into digital euros with one mouse click? The question is also to what extent central banks are actually more trusted as guardians of data privacy.

Mitigating measures are possible for all uncertainties and risks. Central banks are faced with the challenge of realizing the benefits of CBDCs without flying out of control. The ECB is aware of this balancing act, as evidenced by the fact that until October 2023 the time is taken for the research phase. A decision is then expected on the final design and the undoubtedly phased implementation plan. But it seems a certainty that the digital euro will come.

Central banks worldwide are working on CBDCs

Just like the dSterling (“Britcoin”), the USD Coin, the Chinese e-CNY, the Swedish e-Krona and tens or even hundreds of other digital coins issued by central banks, the digital euro (“deuro”) is in the making. The only question is what these “CBDCs” (Central Bank Digital Currency) will look like and do. 

According to a recent report by the Bank for International Settlements (BIS), no fewer than 90 percent of central banks worldwide are exploring the possibilities of their own digital currencies. Last May, the Atlantic Council tracked over 100 central banks exploring CBDCs. (2)

So is the ECB. At the end of last year, the bank started a research phase into the possibilities and consequences of the introduction of a digital euro. This examination will be completed in the autumn of 2023, after which the Governing Council of the ECB will take a decision on whether or not to introduce a digital euro. However, it seems almost certain that this will lead to a positive decision. The first transactions with digital euros would then take place in 2026 at the earliest. That is five years after Annabelle Huang, a 28-year-old resident of Shenzen, was one of the first Earthlings to settle a bag of nuts and yogurt with digital renminbis. The Bahamas were still a few months ahead of China: in October 2020 the first ‘sand dollars’ were already issued there.

BIS grafiek CBDC
Source: Bank of International Settlement (BIS)

But first: what is a CBDC?

A CBDC is an electronic form of central bank money, as banknotes are in the physical world. It is a claim against the central bank, as opposed to money held in commercial banks. Liabilities of a central bank are free from credit and liquidity risks. After all, a central bank cannot go bankrupt. 

CBDCs have a relatively stable price. A digital euro is not “linked” to the euro, it ís a euro. 

With CBDCs, a distinction can be made between an account-based and a token-based CBDC. In an account-based variant, the account holder can transfer money to another account via an access device, withdraw physical cash from an ATM or transfer it to a commercial bank account. With token-based CBDCs, the central bank creates a digital bearer instrument and distributes digital tokens through a regulated digital wallet. When a payment is made, the digital asset itself is moving on the network. Token-based CBDCs can for instance be used for offline peer-to-peer payments. It is likely that digital euros will come in both forms.

Finally, a distinction is often made between ‘wholesale’ (or ‘general purpose’) and ‘retail’ CBDC. Wholesale CBDCs already exist for transfers within the ECB’s Target2 system, but have so far been limited to the participants in this system (banks). ‘Retail’ CBDCs are accessible to the general public, and that is the subject of the research phase that the ECB has started. It is also the core of this article.

CBDC distribution scheme
Source: ING

Most publications on CBDCs assume that, as with cryptocurrencies, transactions will take place via the underlying Distributed Ledger Technology (DLT), or blockchain technology, secured via cryptography. However, this is not a given for the ECB. Other technologies, such as the existing SCT Inst infrastructure, are also candidates for making transactions with CBDCs fast and secure.

In all live implementations and pilots so far, the distribution of CBDCs follows a two-tier model. This means that the central bank manages the infrastructure and the “minting and burning” (creation and destruction) of the digital currency (first tier), while commercial participants, such as banks and fintechs, make the CBDCs available to the public (second tier). The second tier is responsible for tasks such as know-your-customer, AML and account management. A two-tier model means that citizens do not directly hold a current account with the central bank.

CBDC 2-tier payment flow
Source: Visa Economic Empowerment Institute

To be clear, a CBDC is neither a crypto asset nor a stablecoin. Unlike private, unregulated stablecoins such as the TerraUSD and the Luna, which are mainly used for crypto transactions and are algorithmically pegged to the dollar or another fiat currency. Despite that programmed link, the price of such a stablecoin can collapse under certain market conditions, as happened in May 2022 with the TerraUSD.



If you’re not familiar with the CBDC concept, you’re not alone. For the time being, western consumers have little knowledge of the subject. On the one hand, this seems in line with the current phase of the research project. On the other, the appetite for new payment options may be declining. Western consumers have been accustomed to the digitized payment system for years. At the point of sale they use their favorite card, which is increasingly on their mobile phone, some keep a little cash in their pocket for rare shops that don’t yet accept cards yet, and online they choose from a range of ‘one-click’ payment options. It seems that consumers in mature payment markets are more interested in fewer, than in more payment options. In any case, any new payment option must provide substantial added value over current payment options in order to be accepted by the public. So what’s new? Given that technological innovations in the payment system are primarily driven by consumer needs, drivers for innovation are usually improvements in safety, increased reach, reliability and, above all, convenience. Payment service providers do their best to make everything as seamless as possible.

ECB research into consumer preferences

To find out what could get the public excited, the ECB asked a consumer panel about its preferences for a digital euro, as part of the research phase (3). First of all, the survey shows that the interviewees know little or nothing about the digital euro. Second, they believe that the digital euro should be usable everywhere, contactless, instant, everywhere with an equal user experience, suitable for person-to-person payments and independent of platform or device. They consider security important, verification and authentication should preferably take place biometrically, and privacy settings should be flexibly adjustable. That sounds like: the digital euro must meet just about all requirements that commercial providers (banks, fintechs, credit card companies, Paypal, retailers, etc.) have been investing heavily in for years. This certainly applies to countries like the highly digitized Netherlands. 

In short, there is a considerable challenge in enticing consumers and businesses to use digital euros. The ECB and the national central banks will need to explain to the public why they are building a digital euro. 

So in the absence of citizens and businesses queuing for a digital euro, there must be other reasons to pursue this goal. The question arises: where does the global race to bring CBDCs to the market come from? The answer is: the drivers are mainly macroeconomic in nature. They vary by country, but the three main ones are the same everywhere:

The aim of a public variant in the form of a CBDC is to maintain the monetary sovereignty of the home currency (also vis-à-vis foreign CBDCs such as the eCNY)

1. Confidence in the monetary system

Confidence in the market as a panacea for all problems has been severely damaged in recent years. For example, global supply chains proved vulnerable during the corona crisis. Healthcare systems crashed. As a result, more and more people are wondering whether the monetary system is stable enough. After all, it is largely (and increasingly, due to the decline in cash transactions) in the hands of commercial market parties. In the digital world, there are no public alternatives at all. Unfortunately, private parties can fail, as became apparent during the credit crisis of 2008. In 2019, the Dutch Scientific Council for Government Policy (WRR) concluded that the Dutch have become too dependent on the infrastructure of the private sector for their payment transactions. The convertibility of private for public money is under pressure.

That same year, concerns suddenly rose when Facebook announced it would introduce its own stablecoin, the Libra. That announcement sent a shockwave to governments and central banks around the world, fearing that a private digital currency could undermine their own currencies. Alarmed by the political uproar that followed, more and more initiators dropped out. The Libra went defunct, was succeeded by the Diem, which was also stopped, and now there are plans to let users of the metaverse pay with ‘Zuck Bucks’.

The explosive growth of private cryptocurrencies and stablecoins in 2021, and the relative simplicity of starting a new cryptocurrency, have further endangered financial stability. In addition, fraud related to cryptocurrencies and stablecoins is a growing concern (4). Central banks worldwide are therefore considering, in addition to regulations, a public variant in the form of a CBDC. The aim of this is to maintain the monetary sovereignty of the home currency (also vis-à-vis foreign CBDCs such as the eCNY).

“We have to move with the digital age,” said ECB President Christine Lagarde in 2020 about the digital euro. Digital central bank money, as Professor Arnoud Boot calls it, can provide a safe, ‘public anchoring’ for the monetary system.

2. Digitization and financial inclusiveness

Not everyone has easy access to a checking account. Some people have trouble keeping up with the digital world. Central banks have a public task to promote accessibility to financial services and to ensure that everyone has access to payment services. With the decline in the use of banknotes and coins, this can become an increasing problem. If, for example, the payment of internet purchases with CBDCs can be made a lot easier and more efficient, this could help many citizens and companies to participate in the digital revolution. 

This is what DNB says about digitization and financial inclusiveness:

Precisely because digital payment systems have gained the upper hand, we are making an extra effort in the Netherlands and Europe for people who, for whatever reason, have difficulty with digital means. We want to guarantee accessibility without standing in the way of the further digitization of the payment system. Inclusiveness can be achieved in various ways. By guaranteeing access to cash. By teaching people who need it digital skills in the field of payments. And, if that is not possible, by creating alternative forms of physical service or by offering personal support: on location near the customer, via paper or by telephone. Everyone should be able to continue to participate independently in the payment system.

Moreover, whether or not the DLT (blockchain) infrastructure is used for CBDCs, technological improvements are envisioned that further lower the barrier to digital financial services:

  • Almost instant settlement of transactions, similar to instant payments
  • 24/7 availability
  • Offline capabilities
  • Open architecture, enabling greater API functionality among the payments ecosystem
  • Operational simplification and lower transaction costs for merchants

3. Time pressure due to geopolitical developments

All those central banks taking steps to start issuing CBDCs – there is undeniable momentum, maybe even a bandwagon effect. Those left behind risk geopolitical and economic damage. Competition may arise between countries to gain a first mover advantage and stimulate the internationalization of national currencies. With interoperable CBDCs, this could mean new currency substitution risks. Consider, for example, the dollarization trend in developing countries.


"Without the digital euro, it seems likely that the (digital) Yuan will take over the second most used currency from the euro. A digital euro could actually strengthen the international role of the euro."

Although the ECB explicitly denies that there is any race or competition (5), the bank wants to prevent Europeans from putting their money outside Europe. A digital euro could become necessary as an alternative. Indeed, the rapporteurs on central bank digital money to the Dutch Parliament wrote that without the digital euro, it seems likely that the (digital) Yuan will take over the second most used currency from the euro. (6)

In his speech of 15 June to the Committee on Economic and Monetary Affairs of the European Parliament, ECB Board Member Fabio Panetta hints that the project is indeed under time pressure caused by competing CBDCs:

“Moreover, the international monetary system may see the emergence of central bank digital currencies (CBDCs) in large economies. Such CBDCs would offer benefits in terms of efficiency, scalability, liquidity and safety that would support their attractiveness internationally. And they would have the potential to facilitate cross-border payments, which may enhance their role as a global payment unit. In such a context, not issuing a digital euro could undermine the international role of the euro and create additional risks to sovereignty.” (7)

Main issues

Confidence in the monetary system, boosting digitization and inclusiveness, geopolitical developments, monetary policy and increasing concerns about privacy: these are the main arguments for introducing a digital euro. But why will it take at least another four years before that materializes? Well, for starters, central banks are not naturally hasty. But for another, amid a myriad of policy issues (8), there are some major snags.

  • Unpredictability: the most important is perhaps the unpredictability of the consumer. If the next financial crisis looms, and account holders massively convert their assets at commercial banks into risk-free digital euros, the risks for the banks will be much greater than with a physical bank run at ATMs and branches. Commercial banks could fail sooner.

    Even in a stable financial market it is unknown how much private money will be substituted by CBDC. The ECB wants to prevent consumers and businesses from hoarding digital euros instead of spending them. Credit intermediation by private parties could possibly be negatively influenced by this. The consumer panel that the ECB has organized offers few clues in this regard. That is why central bank policy makers are considering a number of instruments to prevent CBDCs from becoming, shall we say, too successful.
    In order to gain experience with the degree of substitution, the introduction will have to take place at least in phases. The amount of digital euros that every citizen is allowed to own could be limited by quantitative limits on individual holdings, withdrawal limits and interest rates, with larger holdings subject to less attractive rates (referred to by the ECB as “tiered remuneration”). The Bank of International Settlements (BIS) writes about this:

“Two fundamental and complementary design features for a CBDC are whether and how to make it interest-bearing and to impose a cap or limit on individual holdings. CPMI-MC (2018) explored the implications of these choices, noting that interest could play a role in controlling demand for CBDC and facilitate pass-through of interest rate decisions. Yet designing a “deposit-like” CBDC could hasten any disintermediation of existing deposit takers. Limits could mitigate the financial stability impact of such disintermediation, including by impeding a possible “run to CBDC” during a crisis, but they would also limit the effectiveness of making a CBDC interest-bearing and come with a wider set of potential drawbacks. Understanding of the interactions between these design features and the potential trade-offs involved is in its relatively early stages. A central bank should have robust means to mitigate any risks to financial stability before any CBDC is issued.” (9)

One of those “potential drawbacks” is the effect on the relationship between private and public money. After all, if you limit the amount of CBDCs in circulation, the effect on confidence in the stability of the monetary system will be correspondingly smaller.

Such critical voices can also be heard in the United Kingdom:

“The introduction of a UK central bank digital currency would have far-reaching consequences for households, businesses, and the monetary system. We found the potential benefits of a digital pound, as set out by the Bank of England, to be overstated or achievable through less risky alternatives. We concluded that the idea was a solution in search of a problem.” (10)

  • Cybersecurity: central banks are not immune from nation-state cyber attacks. In a two-tiered CBDC, criminals – or hostile nations –  could disrupt a CBDC by targeting a central bank that issues a CBDC or the commercial banks that distribute it to the public.The Financial Action Task Force (FATF, 2021) warned that CBDCs will confront unique money laundering and terrorist financing risks that a central bank should address in a “forward looking manner.”
  • Monetary policy: it is nowhere in black and white, but thanks to the digital euro, the ECB may soon be able to do without private intermediaries. Take the ‘quantitative easing’ during the last decade. Since the credit crisis, the ECB has already bought up thousands of billions of euros in debt from governments and companies. Sadly, that money largely remains in the financial sector, where it causes the prices of shares, real estate and other investments to rise. The digital euro gives the ECB a direct tool to reach European consumers and businesses. To stimulate the economy, the ECB could, for example, introduce a negative interest rate or apply a ‘time limit’ to the digital euros issued. Whether it is desirable and possible (after all, such monetary policy is not permitted under the EU Treaty) is a political choice.
  • Data privacy concerns: For citizens and companies who object to the use and trading of their (payment) data, a CBDC can be a privacy-friendly alternative. Of course, provided the central banks promise that their digital traces will not be used for additional purposes, and adhere to this (unless, of course, the consumer gives explicit permission to use his data, for instance in the context of ‘Open Banking’). The ECB is aware of those concerns and writes that, by analogy with “Public Policy for Retail CBDCs” principle 3 of the G7, a digital euro will allow people to make payments without sharing their data with third parties, except when necessary to prevent illegal activities.

    CBDC must protect the privacy of users, including by requiring that the processing of their personal data is subject to laws governing privacy and the collection, storage, safeguarding, disposal and use of personal data that are enforceable in the jurisdiction. Existing laws and regulations differ across jurisdictions, but general principles regarding data collection and processing include: (i) legality, (ii) purpose limitation, (iii) data minimisation, (iv) transparency and accountability and (v) user consent.” (1)

    It remains to be seen how this will work in practice. To what extent are central banks more trusted than commercial banks in this regard? Since the credit crisis of 2008, governments and central banks have gained an even more dominant position in the economy. Professor Arnoud Boot points to the risk that the state will go too far in its meddling in the market, with the Big Brother scenes as in China as a specter. And another thing: what remains of the possible privacy advantage in a two-tier model? 

    In a baseline scenario, a digital euro would provide people with a level of privacy at least equal to or higher than that of private digital solutions. In all cases – public and private – legislation will have to be complied with, such as making it available by order of the Ministry of Justice. The obligation to comply with these privacy requirements as fully as possible is felt even more strongly by a public institution, such as a central bank.


The digital euro: on track for 2026

The ECB’s website states that any future decisions on the issuance of a digital euro will not be taken until after October 2023. First, there must be more certainty about the design to be chosen and about the risks mentioned. After all, the impact on the European economy could be major.

In the nine months preceding the current research phase, careful experiments, involving participants from academia and the private sector, have already been carried out with parts of the digital euro ecosystem to be developed. These experiments assessed design options in the area of the digital euro ledger, privacy and anti-money laundering, limits on digital euro in circulation, access for end users without an internet connection and facilitating inclusivity with suitable devices. No major technical barriers were identified with any of the design options.

The ECB is now using an “expression of interest” to gauge the interest among banks, payment service providers and ICT companies in developing prototypes for the user interface. The ECB specifies 28 separate use cases for the two-tier model, covering all aspects of the design process, from QR codes to user authentication, EID and KYC.

At the same time, the EC is laying the legal groundwork for the introduction of a digital euro. With a ‘Call for ideas’, the Commission is trying to clarify where the challenges lie in the field of legislation and regulations.


It may be wise to err on the side of caution

In short, the train is built and the track is laid. In view of the geopolitical developments, it seems very unlikely that all those preparations will be without effect. When the die is cast, one of the major challenges will be to encourage – or discourage, as we have described – consumer use and merchant adoption. Especially for a new currency and new experience, consumer adoption may largely depend on the robustness of the acceptance network. Quoting Fabio Panetta: “It may be wise to err on the side of caution when calibrating these tools and then adjust based on experience and the take-up of the digital euro over time.”

With all the snags and uncertainties involved, the fact that other central banks worldwide could be ahead of the ECB with the market introduction of CBDCs can also be regarded as an advantage: in addition to European use cases, pilots and a phased implementation, the ECB can learn from real-world implementations elsewhere how to avoid the biggest mistakes.

June 2022

Further reading: DNB on CBDC and the digital euro – interview with Inge van Dijk, Director of Payments and Market Infrastructure at DNB


(1) G7 – Public Policy Principles for Retail Central Bank Digital Currencies (CBDCs), Oct 2021.

(2) source:

(3) source:

(4) According to a recent report from Chainanalysis, crypto-related fraud amounted to ~$14 billion USD in 2021, which is a 79% increase from 2020.

(5) source:

(6) source: Mahir Alkaya (SP) and Aukje de Vries (VVD): “Digitaal centralebankgeld, een overzicht van mogelijkheden, risico’s en aandachtspunten”. 11-02-2021

(7) source:

(8) Visa Economic Empowerment Institute has published an insightful document called “The Art of Public Money”, 2022, which includes a list of policy issues to be taken into consideration.

(9) BIS – “Central bank digital currencies: foundational principles and core features”

(10) Economic Affairs Committee, ‘Central bank digital currencies: a solution in search of a problem?’, January 2022

Picture of Ronald te Velde
Ronald te Velde

Connective Payments
Growth Enabler | Managing partner
+31 657 343 406

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