The digital euro could launch with more of a whimper than a bang. Uptake is likely to be low, particularly if market expectations of a €3,000 per person limit prove correct. Based on that assumption, S&P Global Ratings expects limited deposit outflows at eurozone banks (see chart 1). The potential impact should also be cushioned by the authorities' adoption of an intermediated model in which banks (and other payment service providers) will be compensated for their role in distributing digital euros.
Chart 1
What's Happening
In November 2023, the European Central Bank (ECB) moved to the "preparation phase" of a digital euro, which could be available to the eurozone's 350 million inhabitants within four to six years (depending on lawmakers' approval). It will be the first digital retail currency issued and backed by the ECB, offering an additional means of payment alongside physical cash.
Why It Matters
We see two key risks for financial institutions from the launch of a digital euro.
- It will likely reduce activities related to card issuance and payment processing, resulting in lower fees and commissions for payment providers and banks. We understand the ECB will employ the intermediated model to compensate banks, limit competitive distortions, and mitigate financial stability risks.
- Retail deposits may dip as savers switch over some of their money. The digital euro's central bank backing guarantees payout under any foreseeable scenario and should be additional to eurozone countries' deposit protection schemes, which protect clients' first €100,000.
We think the digital euro offers few benefits over traditional deposits and expect initially weak uptake. That would mirror the experience of countries that have already launched central bank digital currencies. To quantify the deposit outflow risk we considered:
- Demographics, notably reflecting our expectation that those age 20 to 64 are most likely to adopt the digital euro.
- National digital preferences.
- Depositor's confidence in local banks, because low trust could drive higher digital euro adoption.
- The likely average value of digital euros held in digital wallets, particularly considering that those holdings will not pay interest.
Our conclusion is that 2.5% to 10% of the eurozone's 350 million people might convert some of their overnight deposits to a digital euro, based on a wallet cap of €3,000 per person. That translates to €25 billion to €105 billion, or 0.5% to 2.0% of total eurozone overnight bank deposits, based on October 2023 figures.
What Comes Next
In the digital euro's preparation phase, until October 2025, the European Commission will finalize legislation, while the ECB will select tech infrastructure developers and conduct further tests.
The final decision on the digital euro's launch will come only once the legislation has been adopted in full and after further consultation with national central banks, legislators, civil organizations, and payment market providers (including banks). Until then, eurozone financial providers face an uncertain wait.
Background In Brief
Eleven countries already offer retail central bank digital currencies (CBDC). About 20 others are running pilot schemes, with Kazakhstan's Digital Tenge, launched in November 2023, the most recent retail CBDC to be piloted. Just over 100 countries report they are developing a retail or wholesale CBDC--the latter being for larger transactions between banks.
Monetary sovereignty is a key driver of these initiatives. Retail CBDCs can counter the growth of private digital money and crypto assets (including stablecoins), which are outside the control of central banks and thus seen as threats to monetary policy levers.
Europe is on a slow but sure path to monetary digitalization. Cash accounted for 59% of eurozone transactions in 2022, down from 79% in 2016, according to ECB figures. Sweden is a digital front-runner, with cash used in just 3% to 5% of transactions. The digital euro could speed things up. The ECB touts it as cost-free, usable offline, financially inclusive, and superior to alternatives in terms of privacy and cyber security.
Related Research
- Banking Industry Country Risk Assessment Update: January 2024, Jan. 30, 2024
- Tech Disruption In Retail Banking: Country-By-Country Analysis 2023 Leaders And Laggards Emerge, Sept. 27, 2023
- Future Of Banking: E-Krona Will Extend Sweden's Digital Lead, March 01, 2023
- Stablecoins: Common Promises, Diverging Outcomes, June 15, 2022
This report does not constitute a rating action.
| Primary Credit Analyst: | Cihan Duran, CFA, Frankfurt + 49 69 3399 9177; cihan.duran@spglobal.com |
| Secondary Contacts: | Markus W Schmaus, Frankfurt + 49 693 399 9155; markus.schmaus@spglobal.com |
| Nicolas Charnay, Frankfurt +49 69 3399 9218; nicolas.charnay@spglobal.com | |
| Mohamed Damak, Dubai + 97143727153; mohamed.damak@spglobal.com |
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