The European Central Bank (ECB)’s Fabio Panetta has said that a potential digital euro will ‘never be programmable money’.
The ECB executive board member dismissed the prospect of a potential eurozone central bank digital currency (CBDC) being ‘programmable’ – having rules embedded within it that define or constrain its use, for example time limits or restrictions on what it could be used to buy – during his latest appearance before the European Parliament’s committee on economic and monetary affairs.
“Let me be clear: the digital euro would never be programmable money,” he said in scripted remarks (‘The digital euro: our money wherever, whenever we need it’) that preceded a Q&A session with MEPs. “The ECB would not set any limitations on where, when or to whom people can pay with a digital euro. That would be tantamount to a voucher. And central banks issue money, not vouchers,” he said.
The former Banca d’Italia senior deputy governor drew a distinction between programmable money and programmable payments. “Conditional, or programmable, payments are often mentioned as [an] innovative service – however, there is some confusion about the term, and this may raise concerns,” he said.
“Our definition of conditional payments is that people could decide to authorise an automatic payment where pre-defined conditions of their own choosing are met,” he said. “For example: the payer could decide to set an automatic monthly payment in digital euro to pay their rent. But the payee would not face any limitations as to what they can do with this money they receive every month.”
“Supervised intermediaries, who are in direct contact with users, are best placed to identify use cases for conditional payments and any other advanced payment services,” he said.
‘Programmability seems to scare people’
The ECB is beyond the mid-point of a two-year ‘investigation phase’ into the possibility of a CBDC for the eurozone, whose membership increased to 20 nations at the turn of the year as the euro became Croatia’s official currency.
Programmability is a source of interest for digital money specialists in numerous financial authorities worldwide. For example, three months ago the Monetary Authority of Singapore (MAS) published an analysis of its explorations into potential use cases of what it refers to as ‘purpose-bound’ digital money.
The Q&A session saw Panetta expand more colourfully on ‘programmability’, saying he preferred the term ‘conditional payments’ “because programmability usually seems to scare people”.
He offered again the example of monthly rent payments but said that the ECB – which recently invited industry experts for ‘technical talks on programmable digital euro payments’ – “don’t want to do it” (offer ‘conditional payment’ services) “because we don’t want to invade the space of intermediaries”.
“It does not mean that [digital euro] users could not get conditional payments but they would agree that possibility, that feature with their bank, with their intermediary,” he said, emphasising that the ECB would not entertain the provision of retail banking services and citizens “will continue to be the customers of banks”.
Panetta was speaking exactly one week after the Eurogroup, which comprises the finance ministers of the 20 eurozone states, put out a statement on the digital euro that said a eurozone CBDC ‘cannot be a programmable money’.
Blockchain: insufficiently powerful?
The Q&A session also saw Panetta adopt a cautious tone on the potential use of blockchain in the back-end of a digital euro.
“Blockchain is an efficient technology for decentralised systems,” he said. “But there’s no experience whatsoever on the use of blockchain for a very large system. In the case of the digital euro, given that we should serve at least 350 million citizens [eurozone population] plus firms plus possibly some foreigners, then we would have, let’s say, to be conservative 400 million users who on average, might do three transactions per day, so [at least] one billion transactions per day.”
“Just to give you a reference, [crypto currency] Bitcoin does a few thousand transactions per day, [and] every transaction takes quite some time. It would be impossible [to pay for something using a digital euro built on this technology]: your coffee [if bought in a shop] would be cold before you [are able to] pay!”.
“Experts,” he said, believe that “centralised technology is probably more reliable”.
“We have done experimentation with different technologies: centralised, decentralised and hybrid methodology,” he said. “The possibility of having a centralised system with blockchain has not been ruled out. We are now still conducting experimentation – and we will do even more because no solution has been excluded. But let me be clear, the views of many experts is that blockchain technology may not have sufficient power to be used to run such a huge system. But we are still discussing this.”
Eurosystem’s blockchain research base
In the build-up to the ECB’s digital euro investigation phase, numerous central banks within the Eurosystem were researching CBDC back-end technology, including blockchain, for potential use in a digital euro – feeding their results back to the ECB’s Frankfurt HQ.
For example, Estonia’s central bank (Eesti Pank) led a workstream focused on examining the suitability of the KSI Blockchain, a core technology of the Baltic state’s renowned e-government systems, for supporting the digital money infrastructure of a central bank (for example, the digital euro); and Italy’s central bank (Banca d’Italia) also undertook blockchain-related technical research to inform the ECB’s digital euro thinking.
‘The experiment established that a novel blockchain-based solution could in theory support almost unlimited numbers of payments being processed at the same time with a very large money supply and with a smaller carbon footprint than the card-payment system,’ Eesti Pank concluded in July 2021, adding that the blockchain-based solution ‘would also permit a good balance between privacy and the need to meet anti-money laundering [AML] requirements.’
Eesti Pank stated that its experimentation overcame some of what were described as ‘earlier bottlenecks’ in blockchain technology, such as low performance and high energy costs. ‘This technology does not set any essential limits on the size of the money supply. The system is able to handle the entire supply of euros in circulation and more, and there are no limits on the number of money-holders or on the number of payments made simultaneously,’ the central bank stated. ‘The digital euro system built during the test handled over 300,000 simultaneous payments a second and the money reached the payee in less than two seconds. The estimated carbon footprint of the new system was smaller than that of the card payment system currently in use,’ the central bank stated.
Beyond the eurozone, the Federal Reserve Bank of Boston and Massachusetts Institute of Technology’s (MIT) Digital Currency Initiative (DCI) have also been researching back-end tech, including blockchain. Boston Fed announced in December 2022 that its work alongside MIT was ‘now complete’.
Digital euro app: two options
Panetta also discussed ‘front-end’ matters: how users could, in his words, ‘conveniently use’ a potential digital euro.
He was speaking four months after the ECB selected five companies to develop prototype digital euro user interfaces’.
“We are envisaging two options for conveniently using a digital euro,” he said in his scripted remarks at the 23 January session. “First, supervised intermediaries [retail banks] could integrate the digital euro into their own platforms. In this way, users could easily access the digital euro through the banking apps and interfaces they are already familiar with.”
“Second, the Eurosystem is considering a new digital euro app, which would include only basic payment functionalities performed by intermediaries,” he continued. “The app would ensure that no matter where you travel in the euro area, the digital euro would always be recognised and you would be able to pay with it.”
He said the first ‘releases’ are “likely to offer contactless payments, QR codes and an easy way to pay online.” He added: “As the technology evolves, other forms of payment may become available in the future. When it comes to the hardware, people could pay either with mobile phones, physical cards or possibly other devices like smartwatches.”
‘Minimum required development’
A footnote in the ECB’s publication of Panetta’s scripted remarks states that ‘the underlying objective behind making such an app available is to provide the market with the minimum required development, ensuring that intermediaries – including smaller ones who may not want to bear the investment costs of setting up their own payment interface – keep their roles in digital euro distribution.’
The footnote goes on to state that such an app ‘would respond to the preferences of certain end users who have called for an independent access channel in which basic functionalities are available.’
It states that ‘the dual approach of an integrated option plus a digital euro app would yield the best results in terms of providing value for end users, as they would have greater choice’ and adds that ‘this also applies to intermediaries, since they would be able to build their integrated solutions and attract customers through value-added services, whilst overall ensuring a speedy time to market for the digital euro.’ It would, the ECB states in the footnote, ‘also strengthen the position of the digital euro as a payment solution that provides support for the monetary anchor policy objective and pan-euro area reach’.
*** ‘Privacy and CBDCs’, a 17-page paper focused on one of the important design challenges facing CBDC architects, has been published by the Digital Euro Association; and, in the US, a 36-page paper titled ‘Revisiting the Digital Dollar Project’s exploration of a US central bank digital currency’ has been published by the Digital Dollar Project.
Global Government Fintech’s dedicated ‘Digital Currencies’ section
‘ECB inks contracts with five consultancies for digital euro support’ – our news story (14 December 2022) on the ECB awarding digital euro-focused framework contracts to five companies (Accenture, Bearing Point, Deloitte Consulting, Oliver Wyman and Roland Berger)
‘ECB hunts industry expertise to explore programmable digital euro payments’ – our news story (4 November 2022) about the ‘technical talks on programmable digital euro payments’
‘ECB to begin compiling digital euro “rulebook”’ – our news story (5 October 2022) on Fabio Panetta telling the EP’s economic and monetary affairs committee that the authority would ‘soon start work on a rulebook for the digital euro scheme’
‘Five companies picked to prototype digital euro user interfaces’ – our report (16 September 2022) on the ECB appointing five companies (CaixaBank, Worldline, the EPI company, Nexi and Amazon) to develop potential user interfaces
‘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
‘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
‘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 EP’s economic and monetary affairs committee (on 14 April 2021)