The European Commission, the E.U.'s executive arm, will publish a proposal on Wednesday that will be the legal foundation on which the European Central Bank (ECB) could launch a "digital euro."
Digital euro enthusiasts say it will complement cash and ensure the ECB does not leave a gap that could be filled by private, usually non-European, players and other central banks.
Critics question the need for a digital euro and banks warn of major risks, while the ECB's own study found the public was concerned over payment privacy.
"If we are just duplicating the existing payment infrastructure with the digital euro, that is not a good enough business case. For the time being, the digital euro seems to be a solution in search of a problem," German MEP Markus Ferber told AFP.
According to a draft proposal seen by AFP, the commission noted the digital euro's "long-term benefits... outweigh its costs" and warned "the costs of no action can potentially be very large."
The currency would be available for individuals living in the euro area and visitors.
The draft proposal includes a provision that will limit how much money people can keep in digital euros - ECB officials have suggested a cap of 3,000 euros ($3,300).
The commission also said the digital currency would be granted "legal tender" status, meaning it must be accepted as payment.
There will be exceptions including for small businesses that do not accept any form of digital payment, according to the draft proposal.
The move to create a digital version of the single currency began in 2020 when European Central Bank (ECB) President Christine Lagarde suggested the idea and the Frankfurt-based body launched a public consultation.
Lagarde argued in March during a panel event that the digital currency was important for resilience and to "safeguard European payment autonomy".
Many of the means of payments are "not necessarily European", she noted, adding it was "very unhealthy to rely on one single source of payment."
U.S. giants Visa and Mastercard currently dominate the global card payment market.
Her comments are in line with the E.U.'s greater focus on bringing production to Europe or nearer to the bloc and moving away from relying on third countries.
Others argue, however, the E.U.'s plans spell trouble, especially for banks.
The European Banking Federation (EBF) warned in March of the "significant risk for banks" because of the potential for bank runs as customers could hold their funds in digital euro accounts and wallets, moving them away from the banks' balance sheets.
The ECB has a difficult battle to win over Europeans. A public consultation showed that the number one priority when it comes to the digital euro is privacy.
To calm people's fears, the ECB has stressed it would not attempt to control how people can spend the digital currency or use it for surveillance, as critics claim is the case in China.
"The ECB would not set any limitations on where, when or to whom people can pay with a digital euro," ECB executive board member Fabio Panetta said in January.
In the draft text, the commission said the digital euro "will be designed so as to minimise the processing of personal data by payment services providers" and the ECB.