The European Central Bank (ECB) on Wednesday took a new step towards launching a digital version of the euro that would allow people in the 20 countries that share a single currency to make electronic payments safely and free of charge. The ECB said it will begin a two-year "preparatory phase" for a digital euro on November 1, during which it will finalize rules, select private sector partners and conduct some "tests and experiments."


"In two years' time, the Governing Council will decide whether to enter the next phase of preparations to pave the way for a possible future issuance and rollout of a digital euro," the ECB said.

While Wednesday's decision is just a small step in a multi-year project, it puts the ECB ahead of other rich-nation central banks in the Group of Seven (G7) and could serve as a blueprint for others to follow.

Several Caribbean countries and Nigeria have launched digital currencies, while China and Sweden have also launched pilot projects. But the Federal Reserve, Bank of England and Bank of Canada are all cautious about such projects.

A digital euro is for most intents and purposes the same as any online wallet or bank account, but it is free to use and is guaranteed by the European Central Bank rather than a private company, making it even more secure. But the project has its critics, mainly bankers and regulators who worry it will take deposits away from the business sector, but also some academics, EU privacy regulators and some consumer groups.

Markus Ferber, a German lawmaker from the conservative European People's Party, said: "So far, the ECB has not been able to clearly communicate the added value of the digital euro."

One of the main complaints is that digital currencies could facilitate runs on commercial banks in times of crisis, while offering little improvement over existing accounts.

The European Central Bank said a digital euro would bring competition to the payments market, which is dominated by U.S. credit card companies.

To ease concerns about the hollowing out of commercial banks, the European Central Bank said it would set a cap on the number of digital euros an individual can own, possibly around 3,000 euros.

The International Monetary Fund recently said that outside of times of crisis, digital currencies should have little impact on monetary policy and issued a "how to" guide for central banks.

Just like with physical cash, users can use digital euros to make small offline payments to nearby peers, and the ECB says it will not store any data about individual transactions.

The digital euro will be issued by the European Central Bank, commercial banks and digital wallet providers. It will only be available to euro zone residents and their overseas citizens, addressing concerns about mass adoption in countries with weak local currencies.

Electronic payments in the EU grew from 184.2 trillion euros ($201.7 trillion) in 2017 to 240 trillion euros in 2021, with the COVID-19 pandemic accelerating this growth, according to the European Commission.

Central banks representing a fifth of the world’s population are likely to issue their own digital currencies within the next three years, according to a Bank for International Settlements survey.

Many of these projects proliferated around 2019, when Facebook announced plans to launch a digital currency but later abandoned them.

But the rise of stablecoins - cryptographic tokens that are partially backed by traditional currencies - has given new impetus to central bank digital currencies (CBDCs in financial jargon).