This would allow the Frankfurt-based institution to compete with foreign card companies such as Visa and Mastercard or digital payment services like PayPal, sectors where no strong European players have emerged.
A digital euro would "complement cash, not replace it", the ECB has stressed.
The ECB is still studying which technology is best suited to develop the digital currency.
As the Covid-19 pandemic has accelerated a decline in the use of cash, the ECB is also wary of falling behind virtual money issued by private actors like bitcoin and Facebook's yet-to-be-launched diem, formerly known as libra.
And there's pressure to keep up with digital currency pilot projects launched by other central banks, before the ECB misses the boat and consumers end up putting their money elsewhere.
If people in the eurozone were to switch en masse to virtual currencies that operate outside the ECB's reach it could hamper the effectiveness of its monetary policy measures.
ECB president Christine Lagarde said the goal was "to ensure that in the digital age citizens and firms continue to have access to the safest form of money, central bank money".
The Chinese central bank has already started trials with a digital renminbi, while the Bank of England has created a task force to research a possible "britcoin".
The US Federal Reserve and the Bank of Japan are also looking into so-called central bank digital currencies (CBDCs).
What are the risks?
Citizens might avoid traditional accounts in favour of going digital, weakening retail banks in the euro area.
The risk would be higher in times of crisis, when savers might be tempted to flee to the safety of a digital euro and trigger a run on banks.
To avoid this, the ECB will likely cap how many e-euros people could hold in digital wallets, with executive board member Fabio Panetta suggesting a threshold of around 3,000 euros ($3,500).
The ECB will also have to balance privacy demands with anti-money laundering regulations, with experts saying it's unlikely a digital euro can offer the same kind of anonymity as cash.
A key challenge that might emerge is that users "would have to be convinced to switch to a new payment method that is hardly different from existing ones", said Deutsche Bank analyst Heike Mai.
When can I spend mine?
Not anytime soon.
Having completed a preliminary research phase and a public consultation, the ECB's greenlight to move the project into higher gear will kick off a two-year ‘investigation phase’ focused on the digital euro's design and distribution options.
Experts will also study the legislative changes needed to launch a digital euro.
Panetta recently told the Financial Times that if the digital currency is given a final go-ahead, it would take another three years to implement–meaning the rollout is not expected before 2026.