The European Central bank "should be prepared" to possibly launch a digital currency, president Christine Lagarde has said, adding that the public will be asked to weigh in on the issue.
The Frankfurt institution will carry out a series of experiments with a digital euro over the next six months and launch a three-month public consultation from 12 October.
A decision on whether to move ahead with a virtual currency project is expected around mid-2021, the ECB said.
"Our role is to secure trust in money... We should be prepared to issue a digital euro, should the need arise," Ms Lagarde said in a statement.
This digital currency would "complement cash, not replace it", the statement added.
The move comes as consumers increasingly pivot towards cashless payments, and the ECB is wary of falling behind so-called cryptocurrencies issued by private players like Bitcoin and Facebook's yet-to-be-launched Libra.
A digital currency would allow individuals as well as companies to have deposits directly with a central bank, potentially safer than with commercial banks, which could go bust, or cash that could be stolen.
The ECB's deliberations echo those of the US Federal Reserve, which has been researching a digital dollar.
The Chinese central bank started experimenting with digital currency in four cities in April.
Proponents of cryptocurrencies say they allow for faster and cheaper payments, especially across borders, as they cut out the staff, administration and the high costs needed in traditional banking and investment.
Governments in Europe have insisted that any digital currency would require careful supervision.
"A digital euro would support Europe's drive towards continued innovation. It would also contribute to its financial sovereignty and strengthen the international role of the euro," ECB executive board member Fabio Panetta said.
He warned that many hurdles remained, including concerns about privacy and the impact on traditional banking and financial stability.
"But a properly designed digital euro could address these risks," Mr Panetta said.
The Covid-19 pandemic has accelerated the shift towards electronic payments, as customers avoid notes and coins over fears that they might spread the coronavirus.
The ECB applied to trademark the term "digital euro" late last month, according to Bloomberg News.