Skip to main content
Digital society April 18, 2024

Enabling European innovation and competitiveness with the digital euro

By Joachim Wuermeling
Hand holding a mobile phone with euro sign outdoors, on blurred background
“To reap the greatest benefits of innovation in money and payments, we must think big,” declared Agostin Carstens, General Manager of the Bank of international Settlements, at a recent gathering in Singapore.

His assertion is particularly pertinent to the digital euro, a central bank digital currency. Thus far, the public conversation has narrowly focused on “digital cash” function for consumers – thanks in part to how it has been promoted by the European Central Bank (ECB). Yet, its greatest potential is in business-to-business contexts.  

The digital euro promises to pave the way for unlimited innovation across the European economy by redefining the integration of business and payment processes. As a bridge between management functions and technological advancements, the digital euro could significantly boost the global competitiveness of European firms. 

Despite these possibilities, a significant barrier remains: the ECB’s current limitations on providing the essential technologies needed for full implementation. This shortfall underscores the urgency for a strategic pivot towards enabling and promoting more advanced applications of the digital Euro, a goal that ESMT Berlin aims to achieve through the establishment of the “Digital Euro Hub.” 

Technological foundation of the digital euro 

The digital euro represents a significant shift from traditional monetary systems towards a more integrated, secure, and efficient digital economy. The basic function of the digital euro is rather simple: It is transferred digitally from Wallet A to Wallet B after validation by the ECB. It can be purchased from a bank and downloaded to a personal wallet. It can also be returned to the bank, with the proceeds credited to the bank account. All transactions are carried out in a single database and take place in a closed system. 

This transformation is underpinned by the foundational technologies of blockchain and distributed ledger technology (DLT).  

DLT enables an immediate, immutable, and seamless transfer of digital assets, facilitating peer-to-peer transactions without the need for traditional intermediaries. Through the creation of a series of encrypted blocks linked in a chronological chain, DLT ensures that, once transactions are recorded, they cannot be altered, thereby establishing a trusted and transparent transaction history. 

For the digital euro to function within the blockchain framework, it must be converted into a digital format known as tokens. This tokenization enables the currency to be used within the blockchain system, facilitating secure and efficient digital transactions. Unlike traditional forms of money such as cash and bank deposits, which do not have this capability because they are not formatted as digital tokens, the digital euro is engineered to seamlessly integrate with this advanced technology. 

The blockchain ecosystem has primarily been supported by cryptocurrencies like Bitcoin and so-called stablecoins such as Tether. The 2022 implosion of the cryptocurrency market highlighted the vulnerabilities within these alternatives and underscored the need for a robust, stable, central bank-issued digital currency like the digital euro.  

Creating business and public sector efficiencies 

Integrating the digital euro within blockchain technology could bring benefits across various sectors by streamlining transactions, enhancing operational efficiencies, and reducing bureaucratic overhead. 

Convenience for retail sellers and consumers  

Blockchain-enabled systems can revolutionize the retail shopping experience. Consumers could simply pick items off the shelves and exit the stores – no checkout lines needed. Using geolocation and item-specific sensors, the shop automatically handles the rest. The payment with the digital euro facilitates immediate payment to the retailer. Goods provided on commission could be simultaneously paid to suppliers. 

Efficiency in corporate operations and trade 

In international trade, the digital euro enables automatic compensation for goods and services upon delivery confirmation through digital triggers. Merchants no longer need to employ opaque, slow, and expensive tools of traditional trade finance. 

Furthermore, the digital euro facilitates the tokenization of real assets – whether gold bars, vintage cars, or livestock. These can be represented by digital tokens on the blockchain and traded directly, without the logistical burdens of physical movement.  

Smart contracts play a crucial role in this ecosystem by automating contractual obligations and payments. For example, insurance claims or lease agreements can be executed automatically based on predefined conditions. 

Implementing the digital euro thus promises a more integrated and efficient economic landscape, where transactions are seamless, assets are easily fungible, and markets are more dynamic.  

Digitalizing trust in the public sector 

Payments to and from the state can be automated and tied to specific digital events. For instance, the collection of petrol taxes can be executed at the moment of gasoline purchase, registered directly via digital signals at the petrol pump. Similarly, subsidies for equipment like heat pumps can be automatically disbursed when the device is activated. 

The digitization of public administration can be enhanced by integrating the digital euro with blockchain technology for automated payments. These payments can be linked to specific digital events started by citizens or the state, such as registering service usage or fulfilling regulatory requirements. This streamlined approach can speed up the provision of government services while reducing the potential for errors and fraud, enhancing both efficiency and trust in public processes.  

Challenges and opportunities ahead 

To fully harness the benefits of blockchain technology, a reliable means of payment – such as a token that can be seamlessly exchanged and immutably verified – is essential. Current trigger solutions, which initiate traditional account-based payments on the blockchain, are inadequate. They often result in breaks in the media, delays, and failure to support immediate settlement. 

Central bank digital currencies (CBDCs), like the digital euro, can perfectly fill the gap. Whether the ECB will provide this functionality remains uncertain. The current system does not support fungible tokens on the blockchain, focusing instead on simple retail transactions without integrating blockchain technology. 

European legislators, who are currently drafting regulations for the digital euro, appear more receptive. The European Parliament has tabled amendments to the law that require the ECB to make such tokens available to users. The market is also adapting; European banks are exploring tokenized deposits, and some are poised to issue euro-denominated stablecoins under new European laws, potentially serving as private-sector versions of the digital euro. 

Despite these developments, widespread adoption of the digital euro faces significant challenges. Potential users remain unaware of the potential of the digital euro, and it currently presents solutions to broad – rather than immediate – problems. Managers are thus reluctant to adopt the technology. Within organizations, integration of business processes with new payment systems often falls through the cracks, with neither the business units nor finance departments taking responsibility.  

The English travel writer H.V. Morton once wrote, “Don't let the train of enthusiasm run through the station so fast that people can't get on board.” This is where ESMT can play a pivotal role. By providing neutral, academic ground, ESMT could unite stakeholders, facilitate essential research, offer an IT environment for experimentation, and champion the adoption of smart money. By establishing a “Digital Euro Hub,” ESMT could help ensure that the train of digital currency innovation does not speed past without boarding its potential passengers in business, the public sector, and the greater society. 

Add new comment