Beyond Cash and Crypto: All About the Digital Euro and the New European Monetary Sovereignty
There is increasing talk of the digital euro, a currency intended to complement but not replace physical euros throughout the Union. However, there is great confusion surrounding the topic: some interpret it as a kind of cryptocurrency, others as a substitute for traditional currency that will eliminate cash, while still others simply see it as an alternative to international payment systems like Visa, Mastercard, and American Express. With this article, we aim to clarify the situation by explaining the reasons behind the creation of the digital euro, the potential benefits for citizens, and any critical aspects, as well as a deep dive into the technical infrastructure that will govern the new currency once it is operational.
What Are We Talking About When We Say Digital Euro?
The definition of the digital euro comes from the European Central Bank: it is "a digital form of cash, issued by the central bank and accessible to anyone in the euro area," essentially "a central bank digital currency, an electronic equivalent of cash. It would accompany banknotes and coins, offering citizens a broader choice of how to pay." It is immediately clear that the aim is not to replace paper or coin euros but to provide an alternative that coexists with traditional physical payment methods. Its value will be definitively linked to that of the euro and will not have an alternative market. In short, it is neither a cryptocurrency nor a stablecoin.
The question that arises is: why do we need it? Ultimately, when we pay with a credit or debit card, we are merely virtually moving our money. What sense does it make to add an additional layer of complexity?
Let’s start from the premise that digital payments have become the norm and have outpaced physical payments in Europe, even in countries like Italy, which has traditionally relied on cash for payments of all sizes. By digital payments, we mean all types of payment that do not involve the transfer of cash: SEPA transfers, debit cards, credit cards, apps like PayPal, Satispay. The fact is that a significant portion of these payments ultimately occurs through US services. Specifically, most transactions go through Mastercard or Visa networks (both for credit card and debit card payments).
This reliance on foreign infrastructure for such critical services as money transfers is a problem on various fronts. First of all, there is the dependency on foreign policies, in this case, the USA. Payment infrastructures are as fundamental and delicate as those that host data. Should a US president come to power who is hostile to European policies, for instance, a government order could block payment methods. Or, more simply, significantly increase costs for merchants.
And here we arrive at the second problem: relying on Visa, Mastercard, American Express, PayPal, and similar services incurs costs for sellers. These are the infamous fees associated with payments through POS systems, which merchants despise as much as consumers ignore them (since they don't pay them) — these fees are added to those charged by the supporting bank. The digital euro would be advantageous in this regard: fees would not be automatically eliminated, but the European Commission's idea is to make them significantly lower, although detailed information on possible percentages is not yet available.
Practically Speaking, How Is It Used? Are There Limitations?
The digital euro will be entirely equivalent to any digital wallet, such as those from Samsung Pay, Apple Pay, Google Pay, and similar. The wallet will be the tool we use to transfer the digital euro to other people, whether they are merchants, friends, family, or public administration. It will be linked to the IBAN of the bank account. For the end user, its functionality is very similar to that of PayPal: if the account has digital euros, they will be used for the approved transaction. If the transaction amount exceeds the amount available, it will immediately draw from the account via an instant transfer. The same applies if one wishes to move their digital euros to their bank account, where they can be converted back into banknotes, if desired.
An important aspect is that digital euros will never expire. Just like a banknote, they have legal value for their entire lifetime. They do not deteriorate nor can they be revoked. However, there is an important limit to consider: no more than 3,000 euros may be present in the wallet (though there are exceptions for businesses). On the other hand, there are no limits on transfers: currently, no spending caps are specified, and it is assumed there are none, as with bank transfers. Simply, amounts exceeding 3,000 euros are automatically withdrawn from the bank account, and the same applies to receipts.
The advantage of having money in the wallet is that it allows for use in any situation, including offline. It also enables total anonymity in transferring to another wallet via Bluetooth or NFC. However, don't be tempted by the idea of having 3,000 euros always ready, using the wallet like a bank account. Digital euros, as mentioned, are entirely equivalent to physical ones: if you lose or destroy the device, they will go with it — irrecoverable. Conversely, in case of errors or attempted fraud in online transactions, the operators managing the infrastructure will handle the issues.
The Infrastructure Behind the Digital Euro
Initially, the digital euro was supposed to rely on an evolution of TIPS (TARGET Instant Payment Settlement), the infrastructure currently used for instant transfers. It will instead rely on DESP, Digital Euro Service Platform, a completely separate platform that will inevitably need to coexist and interface constantly with TIPS, especially concerning the wallet limitation of 3,000 euros. First and foremost, it is important to highlight that the infrastructure does not rely on a blockchain-style protocol: these are too slow and energy-intensive. Instead, it is a centralized system, like that governing bank transfers, extremely efficient even with a gigantic volume of transactions per second, as in this case. The fact that DESP and TIPS communicate is significant: money cannot be created from nothing. Every transfer is guaranteed by the bank accounts of those making it. Just like with a transfer, instantaneous or not, if there are no available funds, the operation is refused. For this reason, digital euros are fully equivalent to physical ones, and if lost or transferred by mistake, they are gone forever, just like a lost banknote. Does this mean that using the digital euro guarantees anonymity, as if it were 100 euros in cash? Not quite.
Starting from the premise that for all transfers passing through TIPS, every movement is tracked. However, this information is not visible to the DESP platform, which will rely on pseudo-anonymized indicators. Likewise, the TIPS network will only receive pseudo-anonymized information about what happens on the DESP network. We emphasize the term pseudo-anonymized, which implies a fundamental aspect: by cross-referencing various information (for example, at a judge's request), it is possible to trace back to the identities of those who conducted the exchanges. This is a necessity to reduce the risk of money laundering.
A separate discussion concerns offline transfers: these occur at the device level, and only the payer and recipient are aware of each other's identities. However, in this case too, the system is only pseudo-anonymous for several reasons. Firstly, by physically going into a shop, and perhaps linking the payment to a loyalty card, the card can be associated with the device used for the money transfer. Not only that: while transaction data remains solely on the device of the sender and recipient, at the same time, the DESP and TIPS platforms retain visibility on the balance. Practically speaking, if someone were to make numerous offline transactions, the history of these movements would be evident, even though it is not easily possible to trace the individuals involved in the exchanges. Certainly, a person moving tens of thousands of euros daily, even if only offline, could raise some alarm bells.
Smart Contracts and the Digital Euro
The infrastructure underpinning the digital euro also allows for the generation of conditional payments (smart contracts), similar to what happens within various blockchains. What does this mean? It means it will be possible to condition the actual transfer of money on certain conditions being met: the due date of a loan installment, the receipt of an item sent by mail or courier, the occurrence of a specific weather event (for example, hail in the case of auto insurance), checking out of a hotel room, returning a rented car, and so on. It should be emphasized that this does not constitute a kind of programmable money. The payment technically doesn’t “expire,” because that would contradict a basic concept: a digital euro is, in every way, equivalent to a physical one. Consequently, funds will be frozen and inaccessible to the payer and will then be transferred to the beneficiary only upon the condition being met. If it does not occur, the funds will be available again for the wallet they were frozen in.
The Cloud Infrastructure of the Digital Euro
As one can easily guess, establishing a digital euro and relying on an American hyperscaler would nullify all efforts made to ensure the sovereignty and independence of the currency. For this reason, the choice of cloud providers to whom the infrastructure will be entrusted has fallen on European operators. Specifically, the French companies OVHcloud and Scaleway (owned by Iliad). They will be responsible for providing the computational capacity and storage necessary to manage the digital currency, and accordingly, they will provide the system with their data centers, all located exclusively within the territory of the European Union. The two companies will also support the pilot project: they will host the IT framework that will underpin the simulations and practical tests during the initial practical experiments, scheduled for 2027.
Digital Euro: An Additional Step Towards European Monetary Sovereignty?
In summary, the digital euro is a currency that is completely comparable to paper and coin euros, effectively a digital extension of cash. Thus, it is (pseudo) anonymous, within certain limits and under specific conditions. It has nothing to do with cryptocurrencies: it does not fluctuate in value over time, remaining anchored to the euro, given that the ECB will always guarantee a 1:1 correspondence between the money present in bank accounts and the issuance of digital euros. Essentially, it is a fiat currency in every way, therefore a daily payment tool, not an asset to speculate on (unlike Bitcoin or similar). We emphasize “payment tool”: the wallet is designed precisely to simplify daily transactions, even offline in cases where a connection is not available. For this reason, the wallet is not equivalent to a deposit account: it will not be possible to accumulate digital money on the virtual wallet, both due to the maximum limit of 3,000 digital euros that can be loaded onto the wallet and due to the associated risks: as mentioned, losing the smartphone with the wallet is equivalent to losing a hardware key that secures cryptocurrencies.
The real advantage of the digital euro is to reduce dependence on American payment circuits and, hopefully, also the costs for managing digital transactions, as well as facilitating daily payments. Will it eliminate the need for payment cards? This will depend on many factors, but likely no, it will not eliminate them completely. Both because, at least initially, it will only be accepted in Europe: those who travel to other countries will still have to rely on traditional US payment circuits. And because credit cards, as the name suggests, do not guarantee the presence of funds in the current account at the moment of payment. When we use a Visa, a Mastercard, or an Amex, we are fundamentally borrowing money from the institution, committing to repay the debt by a due date (usually monthly). In contrast, a payment with the digital euro is entirely tied to the availability of funds in the current account, just like with a debit card. If the availability is insufficient, the payment will not be authorized.