Fifteen recommendations across design architecture, payment aspects and legal considerations for a potential eurozone central bank digital currency (CBDC) have been presented in a Digital Euro Association (DEA) paper.
The DEA, which is backed by companies including Ripple Labs, RTGS.global and EY, has published its ‘Ahead Of The Digital Euro: Public Digital Euro Working Group Recommendations’ report as the European Central Bank (ECB) approaches the mid-point in its digital euro ‘investigation phase’.
The 27-page report, which its authors state is aimed at all central banks developing a CBDC, asserts that the ECB and European Commission face ‘what is probably the most significant challenge’ facing the 19-member eurozone since its inception more than 23 years ago in deciding whether and how to proceed with a digital euro.
The investigation phase – which includes analysing how a digital euro could be designed and distributed, as well as what changes to European legislation might be needed – is scheduled to conclude in October 2023, after which it will decide whether to start developing a eurozone CBDC.
CBDCs such as the Bahamas’ Sand Dollar and Nigeria’s eNaira are already live, while the US Federal Reserve and Bank of England are among the central banks which – like the ECB – are currently stepping up their explorations. In total, 68 per cent of central banks consider themselves ‘likely to’ or ‘might possibly’ issue a retail CBDC in the short or medium term, according to Bank for International Settlements (BIS) research published in May.
Privacy among the priorities
Among the DEA report’s recommendations is that the digital euro’s architecture should ‘guarantee privacy by design, and must be comprehensive and consider all risks, enabling the full spectrum of features and capabilities like cash does, act as a social lifeline, being universally desirable and inclusive’.
Data privacy is a challenge for CBDC designers worldwide and ranked as top priority in an ECB public consultation on the digital euro whose results were published in January 2021. Global Government Fintech reported last month that the ECB was inviting external experts to participate in a short series of deliberations on data privacy-related challenges involved in designing a digital euro, specifically examining the ‘large-scale application of privacy-enhancing technologies in settlement of retail payments’.
Speaking to members of the European Parliament (EP) on 30 March ECB executive board member Fabio Panetta said that “in a baseline scenario, a digital euro would provide people with a level of privacy equal to or higher than that of private digital solutions”. He told the EP’s economic and monetary affairs committee that “full anonymity is not a viable option from a public policy perspective”, saying that this would “raise concerns about the digital euro potentially being used for illicit purposes” as well as “mak[ing] it virtually impossible to limit the use of the digital euro as a form of investment – but this limitation is essential from a financial stability perspective.”
‘Universal desirability’ would partly constitute a promotional challenge. A paper just published by Oesterreichische Nationalbank (Austria’s central bank) – ‘What can CBDC designers learn from asking potential users? Results from a survey of Austrian residents’ – cautioned that CBDC designers ‘must not underestimate how exotic the concept of CBDC is for large parts of its potential users’ and warned that ‘if the mismatch between policy vision and real users’ needs prevails, CBDC could be at risk of becoming a government information technology project that fails to live up to its ambition.’ The OeNB is a member of the Eurosystem (the ECB and the central banks of the 19 European Union member states that use the euro).
Offline use and interoperability considerations
Challenges facing CBDC designers worldwide include offline use and interoperability considerations.
The former is addressed in the DEA report’s seventh recommendation, which states that ‘digital wallet offline protocols may enable instant payments without any third-party support’. The report states: ‘This may foster the establishment of a subsidised economy right after catastrophic events, even when the mobile network becomes unreliable. However, the secure use of offline protocols requires security features from the users’ devices, and such features are not yet widely available in the field.’
On the topic of interoperability, the report’s ninth recommendation states that ‘to ensure bank interoperability, a standardisation of infrastructure and processing of payment transaction flows is necessary’. It adds that ‘there could be a need to enhance international standards such as [financial messaging standard] ISO 20022 by a digital euro standard’.
‘Without a common standard, there could be the risk that commercial banks or payment service providers will build isolated solutions,’ the report warns. ‘A standardised infrastructure would also mean that every commercial bank, financial institution or PSP [payment service provider] could implement and participate in the digital euro ecosystem. For example, they could be forced to fulfil certain criteria to connect to the digital euro “network”. API [application programming interface] functionality could be used to connect and onboard commercial banks as distributors to the CBDC platform, which can be operated by the ECB.’
Further recommendations in the DEA’s report include that, the digital euro should be created as non-interest bearing ‘to avoid the risks involved in competing with commercial bank deposits and mimic the zero remuneration guarantee of cash’ but that the chosen technology should ‘potentially allow for the interest-bearing feature to allow for future policy changes if needed’.
EESC puts focus on digital euro
The ECB’s digital euro programme manager, Evelien Witlox, who started at the ECB in January, will be among the speakers at a conference on 7 September titled ‘A Digital Euro: Challenges And Opportunities’.
Witlox will take part in the first panel session – ‘What, why and how? Institutional perspective on the introduction of a digital euro’ – alongside Jan Ceyssens, who is digital finance unit head in the European Commission’s Directorate-General for Financial Stability, Financial Services and Capital Markets Union (DG Fisma).
The second panel session – ‘The role of a digital euro in an inclusive, digital and sustainable economy’ – will feature participants including the DEA’s chairman Jonas Gross.
The half-day event is being organised by the European Economic and Social Committee (EESC), a consultative body of the European Union (EU).
*** The DEA has also published an EU-focused report on stablecoins. The 29-page ‘Stablecoins: An Introduction and Recommendations for the European Union’ reviews design choices and features of stablecoins, how stablecoins would interact with CBDCs, and the legal and regulatory considerations, offering eight recommendations to policymakers.
Source: Global Government Forum YouTube page
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‘Digital currency design must be alert to users’ needs: Austrian CBDC paper’ – our news story (16 August) 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 starting to explore ‘interface solutions’ for making payments with a potential digital euro
‘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)