Digital euro passes European Parliament committee vote, expected to be officially launched in 2029

Digital Euro Passes European Parliament Committee Vote, Expected to Launch in 2029

Europe has taken another key step forward in advancing the digital euro. The European Parliament's Committee on Economic and Monetary Affairs (ECON) recently approved the legislative draft for the digital euro with a vote of 43 in favor, 14 against (and 1 abstention). This marks a step closer to the official launch of the digital euro in 2029.

Industry Background

The digital euro project has been in the works for many years, accelerating in recent times due to geopolitical instability and Europe's reliance on US payment infrastructure such as Visa and Mastercard. The European Central Bank launched the investigation phase of the digital euro in 2021 and entered the preparation phase in 2023. Legislators believe the digital euro is an important tool for safeguarding Europe's monetary sovereignty and payment independence, especially against the backdrop of an increasingly global payment landscape dominated by non-European companies.

Currently, Europe's retail payment market is heavily dependent on international card schemes, with cross-border payments being costly and inefficient. Meanwhile, the rise of private digital currencies and stablecoins poses a challenge to the authority of central bank money. The digital euro aims to provide a secure, private, and cost-free public digital currency that can be used both offline and online.

Current Developments

The draft approved by the ECON committee covers several core aspects:

• Issuance and Distribution: The digital euro will be issued by the European Central Bank, and all payment service providers (including banks, electronic money institutions, post offices, and regulated crypto-asset providers) can participate in its distribution.
• Usage Limits: There will be a cap on the amount of digital euros an individual can hold (the specific amount has not yet been announced); businesses cannot hold digital euros but can retain incoming payments for up to 24 hours. The digital euro will not bear interest.
• Merchant Acceptance: Most businesses will be required to accept digital euro payments.
• Non-Euro Area Participation: Another document allows banks and payment service providers from EU member states outside the euro area to distribute the digital euro.
• Cash and Contingency Plans: A third document requires euro area countries to maintain cash accessibility and develop contingency plans for digital payment disruptions.

Notably, the far-right "Europe of Sovereign Nations" group in the parliament voted against it, which means a further vote may be needed when the full parliament votes. However, final approval is expected by the end of this year, after which a two-year technical testing phase will begin, followed by a pilot in 2027 and an official launch in 2029.

Rapporteur Fernando Navarrete Rojas stated: "Europe does not have to choose between a digital euro and successful private payment solutions. We need both to work together. The draft correctly recognizes a dual approach: existing standards and infrastructure should be reused as much as possible. This will allow European payment solutions to connect to a common acceptance infrastructure and achieve cross-border interoperability."

Impact on the Financial System

The digital euro will have multifaceted implications for Europe's financial system:1. Improved Payment Efficiency: Digital euro provides instant free payments, which can significantly reduce retail payment costs, especially for cross-border transactions. 2. Financial Inclusion: Unbanked populations can use digital euro through simple channels, but it should be noted that holding limits may restrict storage functionality. 3. Banking Competition: Banks face the risk of deposit outflows, as users may convert some deposits into digital euro. However, the zero-interest design and caps are intended to mitigate this impact. Commercial banks can still offer value-added services based on digital euro. 4. Compliance Costs: Payment service providers need to upgrade their systems to support digital euro distribution and transaction monitoring, resulting in significant initial compliance investment. 5. Risk Management: Digital euro will enhance the resilience of the European payment system and reduce reliance on a single private infrastructure.