21 November 2023

Parliament: What’s next for the digital euro?

This briefing summarises the conclusions of the ECB’s investigation phase and gives an overview of the recent legislative proposals from the Commission. It also discusses the ECB’s legal opinion, highlighting where the ECB has concerns with the legislative proposals.

These concerns chiefly result from perceived intrusions by the legislation into the ECB’s monetary policy competences. Finally, the briefing points out open questions and tentative answers, including on the delineation of competences between the legislator and the central bank, for the attention of the competent Committee of the European Parliament. 

ECB’s conclusions from the investigation phase
The European Central Bank (ECB) has announced that it will move on to the “preparation phase” of the digital euro project. This is without prejudice to any future decision on issuance, which the ECB would in any case take only after a legislative framework is adopted. The ECB’s announcement follows a two-year investigation into the feasibility of introducing a digital euro to complement cash in response to the increasing popularity of digital payments. A recent ECB report on the investigation phase gives account of the results. For further details, please refer to EGOV’s previous analysis.
The ECB concluded that the digital euro would coexist with physical cash and other electronic payment methods, providing users with more payment options. It is intended to address the risk of dependency on foreign payment providers and to enhance Europe's resilience. It would offer European governance, its own infrastructure, and a platform for pan-European services.

1. The digital euro is designed to be available to residents of the euro area, allowing them to choose their digital euro services provider, and potentially extended to those residing in non-euro area countries. Businesses within the euro area could accept digital euro payments, and the public sector would also be able to make and receive digital euro payments. The onboarding process - basically, the opening of a digital euro account - for users would vary based on existing business relationships and the need for know-your-customer (KYC) checks. It would be usable both online and offline, with online payments requiring payment service provider (PSP) validation and offline payments allowing for a cash-like level of privacy.
2. The digital euro would have holding limits (see also the further discussion below in light of the ECB’s legal opinion). Seeking to ensure a balance between bank deposits and central bank money, individual holding limits would rein in the digital euro as an investment option. Such limits aim to maintain financial stability and prevent sudden large-scale shifts from bank deposits to digital euro, which could impact short-term liquidity and commercial bank funding. Despite holding limits, (reverse) waterfall functionalities (i.e. automatic transfers to/from users (bank) accounts when minimum or maximum holding thresholds are reached) would allow for the execution of a transaction once the threshold becomes binding by optionally means of linking the digital euro account with a payment account.
   The ECB’s investigation phase report foresees that payment service providers (PSPs) would distribute the digital euro and outlines the key roles and responsibilities they would have. Users would open and manage digital euro accounts with PSPs, which would act as intermediaries between the central bank and end users. PSPs would provide essential services, including onboarding/offboarding (opening and closing digital euro accounts), payment instrument management, linking digital euro accounts to commercial bank accounts, and user lifecycle management. The ECB considers the digital euro as a collaborative effort between the public and private sectors, with the aim to make the digital euro widely accessible and functional.
   The report places a strong emphasis on supporting financial and digital inclusion. It acknowledges that euro cash is crucial for financial inclusion. According to the ECB’s argument, as the use of digital payments increases, a digital euro should maintain a similar level of inclusiveness to cash. It follows that the ECB wants to ensure that a digital euro is accessible, user-friendly, and affordable for individuals who may be vulnerable to digital financial exclusion, such as those with low digital skills, disabilities, the elderly, or people living in areas with poor internet connectivity. Member States are expected to designate entities to offer support and assistance to individuals at risk of digital financial exclusion, including onboarding and use of digital euro services, with no cost to eligible individuals....

1.  more at ECON

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