Home Digital Currencies ECB kicks off 2024 with hunt for digital euro ‘components and related...

ECB kicks off 2024 with hunt for digital euro ‘components and related services’ providers

Eurozone currency: the European Central Bank (ECB) is progressing its work on both retail CBDC and wholesale CBDC | Credit: Alexa; Pixabay

The European Central Bank (ECB) has kicked off 2024 by issuing 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’.

The move, which will inevitably catch the eye of the wide range of companies looking to bag digital euro-related business, comes 11 weeks after the ECB’s Governing Council gave a long-anticipated green light to move into a ‘preparation phase’ for a potential eurozone central bank digital currency (CBDC).

The ‘calls for applications for digital euro component providers’ announcement states that the Frankfurt-based institution is looking to establish framework agreements ‘with the most suitable external providers to ensure that the Eurosystem is prepared to start developing a digital euro in the future if warranted’. The five fields of potential business include the development of a digital euro app and ‘offline services’ – one of the more challenging fields of CBDC implementation globally and also the one with the biggest projected spend.

‘At this stage the ECB is not making a commitment to launch any of the development work listed in the calls for applications,’ it states, emphasising that no decision to issue a digital euro will be taken until the European Union (EU)’s legislative process has been completed.

The preparation phase (previously referred to as a ‘realisation phase’) will initially run for two years. It follows a digital euro ‘investigation phase’ launched by the Eurosystem, which comprises the ECB and the national central banks of the 20 EU member states whose currency is the euro, in October 2021.

RELATED ARTICLE European Central Bank gives nod to digital euro ‘preparation phase’ – our 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

Five components and five budgets

The five calls for applications focus on different components for a retail CBDC for the eurozone – meaning a CBDC for everyday use by consumers and businesses. Retail CBDC differs from wholesale CBDC, which is for interbank transactions (see final section of this article for news of ECB progress here).

The five areas are: ‘app and software development kit (SDK)’ components, consisting of a digital euro app and an SDK to support intermediaries (for example, commercial banks) in the provision of digital euro services through their own mobile apps and online interfaces; the ‘offline services’ component, including engineering and development services to provide an offline bearer payment instrument; the ‘secure exchange of payment information component’, which supports the conversion of transactional information (for example, the amount of a transaction) and/or sensitive information (for example, the payment instrument used) into a secure form at the request of an intermediary; the ‘alias lookup’ component, which would facilitate payment transactions by users and intermediaries using simple aliases instead of long account numbers; and the ‘fraud and risk management’ component, which would provide additional support for intermediaries in identifying fraudulent transactions.

According to the respective documentation, the estimated values and maximum values of each of the agreements are: €76.8m / €153.6m for app and SDK; €220.7m / €662.1m for offline services; €27.6m / £55.2m for secure exchange (…); €27.9m / £55.9m for alias lookup; and €79.1m / €237.3m for fraud and risk management. Global Government Fintech calculates the total value of the work at €432.1m (estimated values) and €1.164bn (maximum values). 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.

Each of the five calls has a different application deadline between 8 February and 20 February. After evaluating applications, the ECB plans to invite the highest-ranked respondents to submit offers in an invitation to tender. The ECB notes that framework agreements resulting from this procedure concern ‘only some’ digital euro-related services and that other components, such as the payment settlement system, would be sourced within the Eurosystem.

RELATED ARTICLE Attack versus defence: central bank digital currencies and cybersecurity threats – a write-up of our recent CBDC webinar (14 November 2023) featuring representatives from Brazil’s central bank, the International Monetary Fund (IMF) and University College London

ECB CBDC appointments to date

Numerous external parties have already been engaged by the ECB on CBDC-related assignments during the digital euro investigation phase – albeit with significantly lower ECB spend.

For example, the ECB awarded framework contracts with five companies for digital euro consultancy in November 2022 (Accenture, BearingPoint, Deloitte Consulting, Oliver Wyman and Roland Berger). The consultancies’ framework agreements (which did not entail a definite financial commitment by the ECB towards any specific contractor) are running for four years, with a maximum of two annual extensions. The maximum spend is €20m across all contracts (so, €4m per consultancy if work were to end up being evenly diced).

These appointments followed the ECB’s selection of a different five companies (from 54 applications) to prototype digital euro user interfaces in September 2022: CaixaBank, which concentrated on peer-to-peer online payments; Worldline, which focused on peer-to-peer offline payments; the EPI (European Payments Initiative) company, which examined point-of-sale payments initiated by the payer; Nexi, which explored point-of-sale payments initiated by the payee; and Amazon, which focused on e-commerce payments. These five companies were not remunerated for their efforts and the ECB said there were no plans to re-use the prototypes in subsequent digital euro project phases.

Members of the European Parliament (MEPs) queried the selection of Amazon, expressing concerns including the company’s US roots and market dominance. In an appearance before a parliamentary committee in September 2022 then-ECB executive board member Fabio Panetta (now Banca d’Italia governor) mounted a sustained defence of the process and purpose of appointing the company, saying that the ECB was solely focused on learning about technological solutions and was not “making any deal on future co-operation”.

In parallel to its work with the five companies, the ECB has also worked with the central banks of Austria, Belgium, Finland, France, Germany, Italy, Portugal and Spain (all eurozone states) on ‘back-end’ prototyping.

RELATED ARTICLE Banque de France shares lessons from 12 wholesale CBDC DLT experiments – a news story (27 July 2023) on a 48-page report sharing lessons learned from wholesale CBDC experiments involving DLT being published by France’s central bank

ECB wholesale CBDC progress

The ECB is also making progress in its explorations of wholesale CBDC, with two ‘waves’ of activity on the cards during 2024.

The institution issued a ‘call for expression of interest: exploring new technologies for wholesale central bank money settlement’ on 13 December 2023 through which the Eurosystem invited companies to express their formal interest in taking part in the ‘planned exploration of new technologies for wholesale central bank money settlement’.

Trials and experiments will be conducted using three Eurosystem solutions – respectively developed by Deutsche Bundesbank, Banca d’Italia and Banque de France – enabling wholesale transactions recorded on distributed-ledger technology (DLT) platforms to be settled in central bank money in the Eurosystem-operated T2 real-time gross settlement (RTGS) system.

Companies interested in participating in trials and/or experiments between May and November (‘wave one’) need to respond to the relevant national central banks by 31 January. Companies wishing to join trials and/or experiments between July and November (‘wave two’) need to respond by 30 April.

In April 2023 the Eurosystem announced planned activity to explore potential solutions for central bank money settlement of wholesale transactions recorded on DLT platforms. It ran a survey asking relevant financial market participants to express preliminary interest in joining this Eurosystem effort in October 2023.

A ‘New Technologies for Wholesale Settlement Contact Group’, chaired by the ECB’s market innovation and integration division head Holger Neuhaus, is ‘providing expert input and keep the Eurosystem abreast of advances in the use of DLT and other new technologies in wholesale financial markets’. The group – whose membership largely comprises representatives from major banks and financial services trade associations, as well as national central banks – has now held five meetings (its first meeting was on 21 June 2023 and fifth meeting was on 15 November 2023).

*** Separately, the ECB has also (on 3 January) published a 28-page report summarising progress made by the digital euro scheme’s ‘rulebook development group’ – a group established 12 months ago and whose members are professionals representing consumers, retailers and intermediaries’ associations.

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’)