The European Central Bank (“ECB“) and the European Commission (“EC“) have been exploring the adoption of a digital euro, a central bank digital currency (“CBDC“) in the euro area.
The proposal for the EU Regulation establishes a framework for facilitating and introducing a digital euro. This would be widely usable across the euro area. The digital euro is proposed to have legal tender status of euro cash. This is significant as, while electronic payments already exist, such offerings are provided by private intermediaries. A digital euro with legal tender status would mean a direct claim against the central bank. On 13 July 2023, the ECB released a fourth report on the progress of the investigation phase of a digital euro. This report outlined the ECB’s progress of investigating the benefits of adopting a digital euro. The ECB’s investigation phase dates back to 2021, which sets out basic principles for a digital euro. The investigation phase has engaged institutional stakeholders, including the EC, the European Parliament and euro area finance ministers. Of note, the Eurosystem devised several core principles for a digital euro which are to offer basic services to citizens for free, to reflect its status as a public good and to be in line with user experiences with cash. To enable network effects, intermediaries may be compensated for services provided, while legislative safeguards should prevent merchants from being overcharged by intermediaries. The Eurosystem would bear its own costs, as already today for banknotes.
Recent updates to the digital euro project included:
- On 18 October 2023, the Governing Council of the ECB decided to proceed to the next phase of the digital euro project, the “preparation phase”, commencing November 2023. This decision marks the conclusion of the investigative phase, where a summary report was also published on its findings. The first stage of the preparation phase will last two years, and will focus on further testing, experimenting and consulting of all stakeholders to ensure standards of quality, security and usability of the digital euro. The ECB intends to work closely with EU co-legislators, to provide technical input, in line with recommendations from the EC. Ultimately, the issuance of a digital euro will take place only after a legislative act has been adopted by EU legislative bodies. The legislative process is ongoing and discussions over an EC proposal issued on 28 June 2023 have commenced. This may take some time until a vote is taken, following the EU elections in June 2024.
- On 17 October 2023, the European Data Protection Board (“EDPB“) and the European Data Protection Supervisor (“EDPS“) adopted a Joint Opinion on the proposed EU Regulation. Both bodies acknowledged that many data protection aspects of the digital euro are addressed, including the privacy aspects of the “offline modality”, which currently envisages that smaller payments will have minimal personal data processing. It welcomed consumer choice, that users would have a choice between payment in digital euros and cash. Several recommendations were also proposed in light of data protection and privacy considerations.
Digital Euro: What is it?
A digital euro is the retail arm of a European CBDC. This goes hand-in-hand with concurrent investigations of the Eurosystem and the ECB towards a wholesale CBDC, which would be used for settlement of interbank transfers and related wholesale transactions in central bank reserves. Unlike its wholesale counterpart, a digital euro would be accessible by all persons in the euro area.
The digital euro would be a supplement to euro cash. It would take the form of a universal means of payment across the euro area, which would hold legal tender status (as euro cash) and be widely accepted as a means of payment. The digital euro responds to a competitive rush towards central bank issued digital currencies. This includes China with its digital yuan, which has already been tested in some cities. Or, in the UK with its digital pound, which earlier in the year, published a consultation paper on its investigations. The digital euro is also responsive to competition amongst stablecoins, which are issued by private firms (e.g. PayPal’s PYUSD, Circle’s USDC, or Meta’s stablecoin project, “Diem”). Stablecoin projects have raised questions around their transparency around reserves. Recent examples of banking failures such as Silvergate, Silicon Valley Bank (SVB) and Signature have spilt into crypto markets. At one point, this caused the USDC token to depeg against the US dollar to below 90 cents to the dollar. At that time, Circle announced it had up to USD 3.3 billion in exposure to SVB.
A study of payment trends in Europe revealed a shifting pattern towards e-commerce. Payment habits of the general public were towards using private electronic means of payment, rather than cash, which has put at stake central bank issued money. The COVID-19 pandemic also attributed to a change towards use of electronic payments.
A digital euro would be central bank money that is technologically adapted to the digital age and complementing euro cash. This is important in the digital economy and would be convertible at par with other forms of euro such as banknotes, central bank reserves and commercial bank deposits. This would enhance the monetary anchor role of central bank money as well as foster financial stability and monetary sovereignty in the EU. The digital euro would be a means of payment rather than an instrument for financial investments. From a German perspective, this would not qualify as a security under the Securities Law.
Use Cases and Possible Features
The ECB has articulated at least five use cases for a digital euro. They are:
- Person-to-person payments: Facilitating payment processes between two individuals.
- Consumer-to-business payments: Facilitating payment for goods or services purchased in a physical store or online via e-commerce.
- Business-initiated payments: Facilitating payments between two businesses or from a business entity to an individual (e.g. wages).
- Payments with the government: Facilitating payment to the government (e.g. taxes) and by the government (e.g. allowances and subsidies) could be covered by the digital euro as well.
- Machine-initiated payments: A fully automated payment process initiated by a device and/or software based on predefined conditions.
The Commission’s proposal provides for certain holding limits to the use of the digital euro as a store of value. This could be between amounts to the value of EUR 3,000 – EUR 4,000, as indicated last year by the outgoing ECB Executive Board Member Fabio Panetta.
A holding limit should strike a balance between curbing abrupt outflows from bank deposits on the one hand and user needs on the other. To achieve its objective as a monetary anchor, a digital euro would have to be widely available and useable. The Bank of England, for example, proposes a limit of between GBP 10,000 and GBP 20,000 for the digital pound.
Distribution of the Digital Euro and Privacy Concerns
Distribution of the digital euro would be through private service providers. Payment services providers (“PSPs“) will be authorised in the EU to provide digital euro payment services. This is in accordance with Directive 2015/2366 and respective national laws. These supervised intermediaries would have a direct contractual relationship with individuals and firms using the digital euro and conduct a number of functions and services on behalf of the ECB/national central banks (“NCBs“) in the euro area. In particular, they would manage user accounts/wallets and payment instruments as well as initiate, authenticate and validate transactions, including all anti money laundering and countering the financing of terrorism (“AML/CFT“) related checks. The ECB’s/NCBs’ roles would be confined to the issuance and redemption as well as the recording and verification of all settlements of digital euros, without any direct user contact. They would also manage the supervised intermediaries by providing both a “rulebook” for the digital euro scheme and, presumably, centralised accounts.
Together with the NCBs of the euro area, the ECB conducted experimental work to assess the technological feasibility of the digital euro. This work revealed that an integration with existing infrastructure used by the Eurosystem for instant payments (“TIPS“) should be possible. The experiments also showed that the energy required for the infrastructure is negligible compared with the energy consumption and environmental footprint of crypto-assets such as bitcoin.
A key decision the co-legislators will have to make is how transparent user data will be to the PSPs. The co-legislators must find a balance between secrecy and transparency aspects. They must consider the users’ privacy interests and rights on the one hand and the need for transparency in order to combat illicit transactions, on the other hand. Thus, personal data processing should build on the use of state-of-the-art security and privacy-preserving measures, such as pseudonymisation or encryption, to ensure that data is not directly attributed to an identified digital euro user by the ECB and NCBs. Notably, the EDPB and EDPS acknowledged in their Joint Opinion, that the proposed regulation already addresses many data protection aspects. Particularly the offline solutions would require only minimal processing of personal data to execute the transaction. At the same time, the EDPB and EDPS made several recommendations to better ensure the highest standards of data protection and privacy. This included, for example, introducing a “privacy threshold” for low value online transactions, where there would be no tracing of transactions for anti-money laundering / counter terrorist financing purposes. The EDPB and EDPS also recommended to clarify the data protection responsibilities of the ECB and of the PSPs and advised the ECB to assess whether a single access point of digital euro identifiers is necessary and proportionate to enforce holding limits.
The Eurosystem has considered different approaches to implementing a digital euro, considering the scalability and feasibility of using new and existing solutions. In particular, there are considerations whether to use existing infrastructure (the centralised TARGET Instant Payment Settlement (TIPS) system) and/or decentralised infrastructure such as distributed ledger technology (“DLT“).
To increase the security of payment transactions, a DLT, such as blockchain technology, could be used as the technological basis for the digital euro. In the current monetary system, transaction data is usually stored centrally on the servers of the participating (central) banks. In DLT systems, on the other hand, data is stored simultaneously on several computers and thus in a distributed register. This decentralised storage makes DLT systems more resistant to hacker attacks, as single points of failure are eliminated. Due to the immutability of the transaction ledger, it is not possible to manipulate, tamper with or subsequently alter transactions on the chain.
The digital euro could also make money flows programmable (i.e. with smart contracts). Programmable money has innovative potential in the digital economy. Smart contracts would enable Internet-of-Things devices connected to DLT, such as machines, cars and sensors, to offer services on a pay-per-use basis or even leasing or factoring. DLT is best suited for equipping millions of devices with their own digital wallet, through which CBDC can then be transferred directly from wallet to wallet. In addition, programmable transactions could automatise, for example, tax payments to the tax authorities or dividend payments to shareholders. However, no final decision has been taken regarding the underlying technology of the digital euro.
The investigation phase of the digital euro project concluded with the Governing Council’s recommendation to move into a preparation phase. The preparation phase will start November 2023 and will encompass further experimentation and testing, and consultation of all stakeholders. This particularly includes selecting providers that could develop a digital euro platform and infrastructure that meets both the Eurosystem’s requirements and user needs. A decision to issue a digital euro will only be taken after legislative acts are adopted by EU legislative bodies.
 Ebenroth/Boujong/Joost/Strohn/Poelzig, 4th ed. 2020, section 2 Securities Trading Act (Wertpapierhandelsgesetz, “WpHG“), sn. 6; Zickgraf, AG 2018, 293 (307).