A digital euro, the future central bank digital currency (CBDC) for the euro area, will hold the same legal and monetary value as its paper counterpart and could achieve widespread adoption for everyday retail transactions, provided it is universally accepted and available at no cost. This is the key conclusion of a recent study by Gaston Giordana, an economist at the Luxembourg Central Bank (BCL), which examines consumer demand for the digital euro in Luxembourg. on 27 January 2025, Giordana’s paper uses a micro-simulation model to explore consumer preferences and the conditions that could make the digital euro a success in the country. The study compares various consumer preferences for payment methods--including cash-only, cash-preferring, cashless-preferring and cashless-only--and assesses the potential impact of digital payments using CBDCs under different scenarios.

Consumer behaviour

Drawing on data from the 2022 study on payment attitudes of consumers in the euro area (Space), Giordana derived that in Luxembourg, approximately 1% of consumers were classified as cash-only, 22% as cash-preferring, 28% as cashless-preferring and 49% as cashless-only. These findings suggest that over three-quarters of the population already favour cashless payment methods.

Additionally, Giordana recalled two key behavioural trends among retail customers. First, consumers generally prefer to use fewer payment methods, often sticking to a single preferred option when possible. Second, they tend to adopt additional methods only when their primary choice is unavailable or considered too risky. Based on these observations, Giordana argued that the adoption of the digital euro would depend heavily on two factors: merchant acceptance and security concerns. If these issues are addressed, cashless payment methods would likely have the edge, offering advantages in terms of transaction speed, ease of use and logistical convenience from a customer’s perspective.

CBDC design and adoption

Giordana’s theoretical framework examines how different digital euro designs could influence adoption rates. And to do so, he assumed that the digital euro will be universally accepted by retailers and can be adopted at no cost. This would theoretically lead to two wallet designs: the “debit waterfall” and the “credit waterfall” types.

In the debit waterfall model, digital euro transactions are funded by the user’s associated payment account, such as their bank account. If no holding limits are in place, this design would lead to consumers executing 24% of the total value of their payments in digital euro. However, if a €3,000 holding limit is imposed, meaning consumers could only have access to €3,000 worth of digital euro at a time, the share of payments made using digital euro drops to just 5%, although this reduction depends on the costs associated with refilling the wallet.

In the second model, the credit waterfall, digital euro payments are funded via consumer credit limits, wherein the digital wallets are directly linked to credit cards. Under this model, consumers could execute 92% of their total payments in digital euro, assuming no holding limits. However, with a €3,000 holding limit, digital euro payments would fall to 16%, with the reduction varying depending on the wallet refill costs.

Giordana concluded that the design of the digital euro plays a crucial role in determining its adoption rate, especially when linked to consumer credit. He argues that linking the digital euro to credit sources would significantly boost adoption, making it more widely accepted than traditional card payments at an equivalent cost and with similar convenience.

However, non-adopters--those with a strong preference for cash--remain a possibility, particularly among older consumers or those in lower-income brackets who are less inclined to embrace digital alternatives to cash.

In summary, while the actual adoption rate of a digital euro remains an open debate, Giordana’s study suggests that a credit-linked digital euro system would result in the highest adoption, with consumers likely to switch to digital payments if they offer similar convenience and no additional costs compared to traditional cash or card systems.