Home Digital Currencies ECB publishes progress report on digital euro ‘preparation phase’

ECB publishes progress report on digital euro ‘preparation phase’

Digital euro update: the preparation phase is ‘progressing well’, according to ECB executive board member Piero Cipollone | Credits: Alexa (Pixabay) and © Angela Morant / ECB

An overview of progress towards a potential central bank digital currency (CBDC) for the 20-member eurozone has been published this week by the European Central Bank (ECB).

The ECB entered a ‘preparation phase’ for a digital euro on 1 November 2023 that will initially run for two years. The first progress report on the digital euro preparation phase summarises what has happened since, as well as planned next steps.

A decision on whether to actually issue a digital euro will be taken at a later stage, but not before a legal framework is in place and ‘all functional features’ have been specified.

ECB executive board member Piero Cipollone, who chairs the high-level task force on a digital euro, said in a press release accompanying the 15-page report that the preparation phase was “progressing well” and that it “support[s] the ongoing democratic debate on the legal framework”.

“The digital euro is a common European endeavour. As such, we will continue engaging with all stakeholders, including the European public, to ensure that it is successful and benefits us all,” said Cipollone, who replaced fellow Italian Fabio Panetta on the executive board (and chairing the taskforce) as the preparation phase got underway. Panetta is now governor of the Banca d’Italia, where Cipollone was previously deputy governor.

RELATED ARTICLE European Central Bank gives nod to digital euro ‘preparation phase’ – a news story (18 October 2023) on the Governing Council’s thumbs-up to move to the next stage of the ECB’s journey towards a potential eurozone CBDC

Pseudonymisation, hashing and data encryption

The report (pubished on 24 June) allocates its first two main sections, respectively, to the topics of privacy and offline functionality: two of the biggest challenges facing CBDC designers worldwide (and which also intermesh).

The digital euro’s design includes an offline functionality that would offer users a ‘cash-like’ privacy level for payments in physical shops and between individuals, the report explains. ‘When paying offline, personal transaction details would only be known to the payer and the payee and would not be shared with payment service providers, the Eurosystem or any providers of supporting services,’ it states.

‘In recent months, the ECB has agreed on the technical features required to guarantee that online digital euro transactions will provide an even higher privacy standards than current digital payment solutions, while still ensuring robust end-user protection against fraud,’ the report continues.

It adds that the Eurosystem would use ‘state-of-the-art measures, including pseudonymisation, hashing and data encryption, to ensure it would not be able to directly link digital euro transactions to specific users’. ‘Pseudonymisation’ is a process used to protect personal data by removing identity attributes and replacing them with fictitious ones. ‘Hashing’ is a process used to convert data into a fixed-size string of characters, typically a sequence of letters and numbers.

Payment service providers would, it states, only have access to the personal data that are required to ensure compliance with European Union (EU) law, such as anti-money laundering (AML) regulations. To use data for commercial purposes, payment service providers would need users’ explicit consent. The ECB will also, the report points out, be supervised by independent data protection authorities that will monitor its compliance with the EU data protection regulation (EUDPR) and general data protection regulation (GDPR).

RELATED ARTICLE Banks ‘barking up wrong tree’ over digital euro deposit flight fears: ECB blogpost – a news article (23 February 2024) on a blogpost co-authored by the ECB’s Piero Cipollone, Market Infrastructure & Payments (MIP) director-general Ulrich Bindseil and MIP adviser Jürgen Schaaf

Bridge devices

The offline payments section reports that the Eurosystem is developing an offline functionality that would enable digital euro users to pay without an internet connection after pre-funding their digital euro account via the internet or an ATM. Payments would take place directly between the offline devices – for example, mobile-phones or payment cards – belonging to the users involved in the transaction, without having to rely on third parties.

The Frankfurt-headquartered ECB has been investigating ‘technical tools already available on the market’ that could allow the settlement of offline digital euro transactions directly in end users’ devices, the progress report states. It has also assessed ‘other essential aspects’ of offline digital euro payments, ‘with a view to making them seamless, secure and user-friendly’, it adds.

The ECB’s technical work has focused on delivery considerations and how to fund and defund offline digital euro wallets, including how to perform AML and forgery checks. For offline payments, users would be able to use their mobile devices, while the Eurosystem is also investigating the potential use of ‘battery-powered smart cards or non-powered smart cards which use a bridge device to communicate’.

A ‘bridge device’ is defined in the document as a ‘simple, pocket-sized, battery-powered device for establishing a connection channel between two non-powered smart cards, enabling transactions between them’.

The effective implementation of an offline digital euro on mobile devices will, it states, ‘ultimately depend on the requirements laid down for equipment manufacturers and providers of electronic communication services’ in digital euro regulation.  

RELATED ARTICLE Think you know CBDCs? An A(CID) to Z(KP) test – a feature article (26 June 2023) focused on some of the many technology considerations involved with CBDCs (the article is based on a Bank of England ‘Digital pound: technology working paper’)

Rulebook: seven new workstreams

The remaining sections of the report focus on the digital euro rulebook; ‘selecting providers for digital euro components’; ‘other aspects related to digital euro design’ (split into ‘methodology for the definition of holding limits’ and ‘environmental aspects’); ‘technical input provided in the context of the legislative discussions’ (split into ‘number of digital euro accounts per user’, ‘compensation model’ and ‘user experience’); and ‘next steps’.

In respect of the rulebook, the digital euro ‘rulebook development group’ has completed an interim review of its first draft. Seven new workstreams – for areas including ‘minimum user experience standards’, risk management and implementation specifications – have been established to help finish the next draft, which is expected to be delivered by the end of 2024. A progress report will be published ‘by the third quarter’.

In respect of components, it is almost six months since the ECB issued five calls for applications – carrying a total estimated spend of €432.1m (about £373m) and a potential maximum spend of more than €1bn (more than £862m) – to set up framework agreements with potential providers of digital euro ‘components and related services’. All frameworks are estimated to start in January 2025 and run for a minimum four years, with a maximum contract duration of 10 years – or, in two cases, 15 years. ‘The Eurosystem will now proceed with the selection process by inviting the highest-ranked respondents to tender,’ the new report notes (effectively re-stating its already-communicated plan). It adds that ‘offers received in the procurement process will be negotiated in the subsequent months before making a final selection’.

In respect of holding limits, the ECB states that it has ‘started work on a calibration methodology to define the holding limits, which entails a comprehensive monetary and economic assessment’; that a newly created workstream, including experts from the national central banks of the Eurosystem and national competent authorities, ‘has begun to identify the factors that could influence the holding limits calibration’; and that the ECB has launched a ‘dialogue and a data collection exercise to obtain the granular data required to perform the assessment’.

RELATED ARTICLE ECB kicks off 2024 with hunt for digital euro ‘components and related services’ providers – our news story (4 January 2024) on the ECB’s five calls for applications

Nagel: ‘jury still out’ on holding limits

A limit of €3,000 (about £2,531/$3,208) per person has been mooted in the past as a digital euro holding limit.

This is lower than UK authorities have proposed for a potential UK CBDC (‘digital pound’), where a range of £10,000 (about €11,855/$12,664) to £20,000 (about €23,710/$25,328) ‘at least during [an] introductory period’ has been proposed (corporates would also be limited in their holdings but the limit would be significantly higher).

Deutsche Bundesbank president Dr Joachim Nagel said in a speech in Rome yesterday (24 June) that, in his view, the “jury is still out” on the optimal digital euro holding-limit level, referencing a recent Bundesbank discussion paper (‘CBDC and banks: Disintermediating fast and slow’) that indicated that the optimal amount could be in the range of €1,500 to €2,500 per person.

More broadly in his speech, titled ‘The digital euro – unifying and trustworthy’, Nagel said that although “important progress” had been made on the path to a potential eurozone CBDC “we still have a long journey ahead of us”. He concluded, though, by stating that he is “profoundly convinced that this project will be an economic success”.

In respect of next steps, the ECB mentions that it will ‘continue to engage with the general public’ and that user research will be carried out among consumers and merchants across the euro area to ‘fine-tune our knowledge of potential digital euro users and their views on specific features, and to make sure that a digital euro would be easy to use’. The ECB began recruiting for a ‘head of positioning and outreach division’ (digital euro) earlier this year. Ryan Gawn took up the position earlier this month, relocating from a Denmark-based global role with the LEGO Foundation.