Driving competitiveness with the digital euro

Imagine a world where payments are seamless, automated, and integrated directly into the flow of everyday life. Transactions between businesses, consumers, and public institutions occur without the friction of traditional banking processes. Smart contracts automate payments when conditions are met, streamlining cross-border transactions. This vision is not distant speculation; it is increasingly within reach through innovation.

At the core of this transformation is the digital euro – a central bank digital currency designed to support a digitally interconnected economy. Underpinned by blockchain and distributed ledger technology (DLT), the digital euro offers a new paradigm for payments and economic interactions. By enabling direct transfers of value without intermediaries, it has the potential to drive innovation and competitiveness across sectors. However, to realize this potential, the technology must be implemented thoughtfully, ensuring security, efficiency, and widespread adoption.

ESMT has been selected as a Pioneer Innovation Partner by the European Central Bank (ECB). As part of this collaboration, we will establish the Digital Euro Hub, a platform for simulating programmed payments with the digital euro and testing smart contracts. By fostering collaboration between academia, business, and public institutions, ESMT will shape the future of digital payments in Europe.

Technological foundation of the digital euro

Digital tokens enable secure and efficient transactions by representing physical and financial assets. Bonds, for instance, were once issued on paper but can now be created, bought, and sold entirely in digital form. This digitization also extends to various goods and services, which can be packaged as tokens and traded without the need for a physical exchange.

Digital payment systems enable direct transactions between digital wallets with reduced reliance on banks, payment providers, or account links. The digital euro, for example, can be acquired and securely stored in a personal digital wallet, with the Eurosystem verifying transactions.

The key technology enabling these developments is distributed ledger technology (DLT), with blockchain being one of its most widely used types. DLT records transactions in a decentralized, encrypted, and immutable way, creating a trusted chain of digital asset transfers. This structure eliminates the need for intermediaries and ensures transparent, verifiable exchanges.

One of the most practical applications of DLT is the smart contract – a self-executing protocol that triggers payment once a specific condition is met, for example, when a good is delivered or a service is rendered. For the automated process to work, the currency must be in the form of a digital token.

Traditional forms of money, such as cash or bank deposits, cannot function as digital tokens. Only cryptocurrencies like Bitcoin and stablecoins, such as USDCoin (USDC), are compatible with blockchain transactions. Although stablecoins are designed to maintain a consistent value like central bank money, recent crypto market disruptions have exposed their vulnerabilities. As the Bank for International Settlements pointed out, “There is no substitute for the real thing.”

The absence of a reliable digital payment method has been a major barrier to blockchain’s adoption for routine transactions, despite the technology’s long-standing availability. The introduction of a CBDC like the digital euro could resolve this issue by providing a stable and legally recognized form of digital money.

This brings up a critical question: What kinds of applications could the combination of blockchain technology and the digital euro enable?

Real-world applications of the digital euro

Blockchain transactions powered by the digital euro have the potential to revolutionize a wide range of sectors. The digital euro drives efficiency and innovation in consumer, business, financial, and public sectors through automated, secure payments.

Consumer applications

The digital euro can significantly enhance convenience and automation in everyday transactions. Imagine entering a store, picking up items, and leaving without checkout. Geo-data detects the customer, while product chips signal removal, triggering automatic payment. If the items are supplied on commission, the supplier is paid simultaneously.

Business applications

The digital euro can optimize operational processes within companies. For machine rental payments, a corporation could pay only for actual usage hours, with the machine recording usage on the blockchain and triggering automatic payment. Similarly, in international trade, blockchain-enabled verification of goods or services can streamline settlement, reducing reliance on slow traditional processes. For digital asset representation, physical items like gold or vehicles can be tokenized on the blockchain, enabling ownership transfer without physical movement while smart contracts automate complex agreements.

Financial services applications

The digital euro can simplify financial operations, from bond issuance to interest payments. For instance, a digital bond can be sold directly via blockchain. When the buyer’s digital euro arrives, ownership is automatically transferred to the new holder. Additionally, payments related to the bond’s lifecycle — such as interest or principal repayments — can be automated, eliminating manual processing errors.

Public sector applications

Government services can benefit from the digital euro’s capacity for automated and traceable payments. For example, the petrol tax could be collected automatically when a gas station registers a fuel purchase. Similarly, subsidies, such as those for installing a heat pump, could be paid out when the system verifies that the device has become operational.

Automating payments linked to digital events created by citizens or institutions can greatly reduce administrative burdens, making public services more efficient and responsive.

The potential applications of the digital euro go beyond just these examples. By enabling end-to-end digital processes, it supports the emergence of new economic models across various technological domains. The digital euro will be a cornerstone in integrating digital payments into both private and public life.

Taking the digital euro from promise to practice

Realizing the potential of the digital euro requires a blockchain-ready token that seamlessly integrates with digital financial infrastructures.

Central bank digital currencies like the digital euro can address this need. However, until recently, the digital euro’s design did not include features that made it compatible with blockchain as a fungible token. Progress has been made. Last year, the ECB conducted 50 trials with 60 participants, facilitating transactions between financial institutions worth €500 million. Additionally, the ECB launched an initiative to explore innovative applications of the digital euro in B2B payments.

While central banks are leading these efforts, the private sector is also exploring blockchain-ready payment solutions. For instance, European banks are working on tokenized deposits, while some private companies are preparing to issue regulated, euro-denominated stablecoins as digital euros.

Despite this progress, significant challenges remain. One key obstacle is awareness: many potential users in both the public and private sectors remain unaware of the digital euro’s potential benefits. Managers may hesitate to invest in these technologies, because they do not directly address urgent issues, instead appearing as vague or long-term opportunities.

This is where ESMT can make a difference. As a neutral academic platform, ESMT can bring together stakeholders from academia, business, and the public sector to collaboratively explore and test innovative applications of the digital euro. The Digital Euro Hub will provide an IT environment for experimentation and research, fostering practical insights into implementing digital currency solutions.

As the digital euro positions Europe as a global leader in central bank digital currencies, its true value will emerge from advanced applications in industry, services, and the public sector. Managers must embrace digital money, positioning their organizations at the forefront of innovation. ESMT, through the Digital Euro Hub, stands ready to support this transition by facilitating research, collaboration, and practical experimentation.