What is the EU planning for its digital Euro?

Samuel Lopes

The EU is getting ready to finalise its plans for its Central Bank Digital Currency (CBDC), sometimes referred to as the ‘digital Euro’.

Although the legislation was previously reported to be delayed, the European Commission published its proposal for their digital Euro on the 29th of June. In it, they laid out their plans for a potential EU CBDC. The digital Euro will now move to an investigation phase, and the Governing Council of the ECB will provisionally decide whether to administer the digital Euro in October 2023.

Central banks have identified several use cases for CDBCs over the past few years. Although a consensus has yet to be reached over whether they should be introduced by all central banks, some – China chief among them – have already implemented them.

Perhaps the most pressing reason for a central bank to introduce a CBDC is to safeguard public money as cash use declines; people’s confidence in private money (like those in your bank’s current account) in principle stems from the fact that they can easily convert their funds one-to-one to public money (which at present takes the form of cash) backed by the central bank. For this reason, the EU considers public money a ‘monetary anchor’ for the financial system. The elevator pitch for CBDCs is that they maintain the backing and availability of public money in the financial system but incorporate the advances in payment services spearheaded by commercial banks in the past few decades.

Despite often being lumped alongside them, CBDCs are not cryptocurrencies, nor do they necessarily need to use blockchains or distributed ledger technologies. The value of a CBDC cannot go up or down relative to cash. Unlike stablecoins, whose operators typically hold a reserve of fiat currency to maintain their stablecoin’s peg, CBDCs are directly backed by the central bank – this means that there is a guarantee of its value (unlike, for instance, the ill-fated TerraUSD stablecoin).

In the EU’s legislative proposal, they commit to the digital Euro having both online and offline payment functionality. This is vital to support adoption in rural areas where an internet connection is not guaranteed. Both online and offline payments must also be implemented with a high level of anonymity and privacy – the EU promises that, when making payments, people can ‘disclose less personal data than … card payments’. These two commitments preserve one of the main advantages of cash transactions – the ability to make payments easily and anonymously.

The private sector and payment service providers (PSPs) have a vital role to play in the digital Euro ecosystem. PSPs may be existing commercial banks or new ‘challenger’ banks like Revolut. They would provide an interface to users through which they could open and manage their digital Euro accounts. By putting PSPs in charge of providing payment instruments, the EU has given the private sector considerable scope with which to implement new financial innovations.

Businesses, for their part, would be required to accept the digital Euro; however, the EU is willing to make an exception for micro-enterprises and SMEs if their changing costs of accepting the digital euro would be disproportionately high and if they already accept a ‘comparable digital means of payment’.

Financial inclusion is also a key priority for the EU, as they have promised to allow a digital Euro account to be opened by people ‘without bank accounts to make or receive digital payments, to access basic functionalities free of charge’. People who are currently less able to use the digital banking system or rely on cash payments for transactions will be prioritised, thereby ‘cutting the digital divide’. The EU has suggested that individuals may be able to open accounts at a post office or another public authority, and has promised easy-to-use and accessible interface standards for people with disabilities.

The EU’s commitment to privacy means that anti-money laundering (AML) protections are crucial to ensure the platform is not used for organised crime. The EU recently proposed to strengthen all AML protections in 2021, and the EU has confirmed that payments made with the digital Euro will be subject to the same expanded AML protocols.

However, it remains to be seen how the EU will square these commitments with its statement that payments made with the digital Euro will have the same level of privacy as cash. The EU has said that limits will be imposed on the amount of digital Euros that people can hold at a time, but that users could have several wallets for different purposes. This aims to preserve commercial banks’ role in distributing cash in the economy.

The EU’s approach to solving the privacy/security trade-off is different from the Bank of England, who have proposed tiered accounts that allow the user to hold different amounts of a digital Pound depending on how much personal information the user is willing to divulge. However, in line with other CBDCs, the Digital Euro will not be remunerated; people will not be able to earn interest on the amount kept in their digital Euro wallet.

One major decision which may set the digital Euro apart from other CBDCs is its rejection of programmability – ‘it cannot be programmed by public authorities to be used … for specific purposes’. The EU’s position on this was first reported by Coindesk and later confirmed by the EU itself. However, individuals will be able to set up recurrent payments in the same way they can currently do so with commercial bank accounts.

The EU, along with other central banks, consider CBDCs crucial to – in Commissioner McGuiness’ words – ‘keep access to public money in a digital world’ as well as safeguard their respective fiat currency’s importance at the international level.

If implemented properly, CBDCs may steward the stability of the world’s financial system even in the face of rapid and disruptive digital innovation.

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