The European Central Bank (ECB) is to start developing a digital euro ‘rulebook’ in one of its latest moves towards a potential central bank digital currency (CBDC) for the 19-member eurozone.
The Frankfurt-headquartered authority has reached the mid-point of a two-year digital euro ‘investigation phase’ and the past week has seen various updates from the European Union (EU) institutions on the high-profile digital money project’s next steps.
During an appearance in front of the European Parliament (EP)’s economic and monetary affairs committee on 29 September, executive board member Fabio Panetta said the ECB would “soon start work on a rulebook for the digital euro scheme” in the context of working with private banks to distribute the digital euro and for financial services companies more broadly to “build on it to develop further innovative solutions for their customers”.
In scripted opening remarks, ‘Building on our strengths: the role of the public and private sectors in the digital euro ecosystem’, Panetta said that “putting in place a set of rules from an early stage is crucial for the market to be able to develop digital euro solutions and be ready if and when a digital euro is introduced.”
“We will work together with different stakeholders – intermediaries, consumers and retailers – so that they can contribute their views and expertise as the scheme is being developed,” Panetta said.
ECB analysing ‘possible compensation model’
In 14-minute opening remarks to the committee, Panetta said the private sector would have a “key role” to play with a digital euro – should the CBDC receive a green light – but acknowledged that this would “require a pricing strategy that provides adequate economic incentives to foster the adoption of the digital euro”.
The ECB is, he said, “currently analysing a possible compensation model for the digital euro – a topic that is also relevant for the European Commission.”
The ECB recently concluded its search for private-sector support to develop potential user interfaces for the digital euro by appointing a five companies to build prototypes: CaixaBank is concentrating on peer-to-peer online payments; Worldline is looking at peer-to-peer offline payments; the EPI (European Payments Initiative) company is examining point-of-sale payments initiated by the payer; Nexi is exploring point-of-sale payments initiated by the payee; and Amazon is focusing on e-commerce payments. The companies are not being remunerated for their efforts and the ECB has said there are no plans to re-use the prototypes in subsequent phases of the digital euro project.
In parallel the ECB is also working with the central banks of Austria, Belgium, Finland, France, Germany, Italy, Portugal and Spain (all eurozone states) on ‘back-end’ prototyping.
The 29 September session’s Q&A period was dominated by MEPs querying the ECB’s selection of Amazon, expressing concerns including the company’s US roots and market dominance. Panetta 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”.
‘Selective privacy’ and ‘offline functionality’
Also on 29 September the ECB published a report ‘Progress on the investigation phase of a digital euro’. The 10-page document sets out the key objectives and use cases for a digital euro, as well as looking at topics including online and offline availability, tools to control the amount of digital euros in circulation and user privacy.
A ‘selective privacy’ option would allow greater privacy for low-value/low-risk payments, the document states. Users would need to identify themselves when first starting to use the digital euro, but simplified due diligence checks could apply, enabling a higher degree of privacy for low-value/low-risk payments. At the same time, higher-value transactions would remain subject to standard controls. It would also be important to ensure that large payments are not split into many smaller ones to circumvent checks, the document notes.
An ‘offline functionality’ option would enable greater privacy for low-value offline payments in close physical proximity (payments where the payer and payee are not connected to the internet and, by design, need to be in close physical proximity when making a transaction – like paying with cash). While customers would be subject to checks during onboarding, real-time information about holdings, balances and transaction amounts would only be known by them and not by third parties, such as financial intermediaries or banks. By limiting offline payments to low-value payments and to situations where the payer and payee are in close physical proximity, the risk of illicit use could be contained, the document states. ‘At the same time, people could benefit from greater privacy. In addition, enabling an offline functionality may also be beneficial for financial inclusion, given the lack of internet coverage in large remote areas in certain euro area countries,’ it adds.
‘Further work is needed’
‘Further work is needed to explore how the two options could be enabled in the regulatory framework – for example, how to exempt low-value/low-risk digital euro transactions from certain anti-money laundering (AML)/combatting the financing of terrorism (CFT) obligations,’ the document states, adding that the Eurosystem is discussing this with the Commission and European data protection authorities.
‘Given that a digital euro is not yet explicitly foreseen in [European] Union legislation, a regulatory framework should be set up to establish and regulate essential aspects of the digital euro, including with a view on privacy, for instance, data protection, AML/CFT,’ it adds.
The Commission expects to publish a proposal for a regulation to establish and govern essential aspects of the digital euro in the first quarter of 2023.
In terms of the ECB’s timeline, its governing council is scheduled to decide in autumn 2023 whether to start a ‘realisation phase’ for a digital euro. This phase could last ‘around three years’, according to the 10-page document. A decision on possible issuance of a digital euro ‘may only come later’.
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‘Five companies picked to prototype digital euro user interfaces’ – our report (16 September 2022) on the ECB appointing five companies from 54 applications
‘Government payments among three priority use cases for digital euro: ECB’ – our report (7 September 2022) from a half-day event (‘A Digital Euro: Challenges And Opportunities’) featuring the ECB’s digital euro programme manager Evelien Witlox
‘Fifteen recommendations offered for digital euro as ‘investigation phase’ nears half way’ – our news story (24 Aug 2022) on a paper by the Digital Euro Association
‘Digital currency design must be alert to users’ needs: Austrian CBDC paper’ – our news story (16 August 2022) on the ‘What can CBDC designers learn from asking potential users? Results from a survey of Austrian residents’ working paper published by Oesterreichische Nationalbank (OeNB)
‘ECB consults experts over ‘privacy-enhancing’ digital euro tech’ – our news story (20 July 2022) on the ECB inviting external experts to participate in a short series of deliberations on data privacy-related challenges involved in designing a digital euro
‘Digital euro prep enters prototype territory’ – our news story (3 May 2022) on the ECB’s call for expressions of interest
‘ECB kicks off €20m tender for digital euro architects’ – our news story (2 March 2022) on an ECB tender process for design and business model consultancy
‘D€: unanswered questions (and quirks) amid Europe’s CBDC “nitty-gritty”’ – our analysis (20 September 2021) of eurozone central banks’ digital currency explorations
‘Digital euro tech investigations would take two years: ECB’s Panetta’ – our news story (15 April 2021) on a Fabio Panetta appearance before the European Parliament’s economic and monetary affairs committee (on 14 April 2021)