On 28 June 2023, the European Commission released its long-awaited proposal for a digital euro. This proposal kickstarted a phase of political negotiations that should, all things being equal, lead to the adoption of a regulation of the first Eurozone central bank digital currency (CBDC). On 18 October 2023, the European Central Bank (ECB) announced that it was concluding its two-year investigation phase of the digital euro and moving towards the preparation phase.
On paper, everything seems on track for the ECB to issue a digital form of euro banknotes and coins in the next few years. In reality, as we have explained elsewhere, the current proposal on the digital euro is a missed opportunity to provide people with a universally safe and electronic form of public money. However, the European Parliament and European Council can still remedy the proposal by ensuring three things: (1) that the digital euro has a very high level of privacy, (2) that it is usable for people by allowing for the gradual increase of holding limits, and (3) that people can access it through non-profit and public intermediaries.
Ensuring a very high level of privacy
In our previous blog on the digital euro, we explained the merits of cash as public money, namely, that it is the most liquid, risk-free and anonymous asset that people have access to in the economy today, and that it plays a crucial role in establishing trust in our monetary system [1]. For these reasons, it is important to have a digital form of cash in an increasingly digital world. Without it, we would have to rely entirely on private money, the safeness of which lies in the hands of profit-seeking corporations, namely private banks.
Article 4 of the Commission’s proposal makes it clear that the digital euro, like cash today, will be a direct claim on the ECB, which unlike private banks, cannot go bankrupt [2]. This ensures that the digital euro, like cash, will be a highly risk-free and liquid asset. Where the proposal falls short, however, is in ensuring that the digital euro will have cash-like privacy features.
Privacy is one of the main concerns that people have about the digital euro, as evidenced by the results of the ECB’s public consultation on the topic. A high level of privacy and data protection in the design and distribution of the digital euro is therefore crucial to its adoption by users, and thus its success. While the Commission’s proposal acknowledges this [3], it fails to ensure the highest level of privacy for online digital euro transactions by allowing payment service providers to record these transactions, irrespective of their amount. To this end, the proposal should be remedied by introducing a privacy threshold for low-value online digital payment transactions, as recommended by the European Data Protection Board and the European Data Protection Supervisor, the European consumer organisation (BEUC), and the ECB itself. This would balance the need for privacy with the anti-money laundering (AML) and anti-terrorism financing (CFT) considerations.
An online digital euro will never meet the level of anonymity offered by cash by the simple fact that people will carry out payment transactions through an online account, with supervised intermediaries who will need to run checks on the identity of the person opening the account. For higher amounts of online transactions, AML/CFT considerations also come into play and will need to be balanced against individuals’ rights to data protection and privacy. For this reason, the ‘offline version’ of the digital euro foreseen in the Commission’s proposal is crucial.
However, the current proposal, by defining the offline version as a ‘local storage device’ [4], risks limiting the digital euro to design features that do not meet people’s privacy and use expectations. Article 37 makes it clear that payment service providers should register and deregister the local storage devices, and that they will process identifier data of the local storage device that would link it to the owner of that device. They would also process data related to the depositing and/or withdrawing of digital euros from the local storage devices into the digital euro payment account, and vice-versa. Moreover, the offline version is only to be used for proximity payments [5]. The proposal should be remedied to make the offline digital euro more cash-like by clarifying that the offline version should be designed as a ‘bearer instrument’, which could be used for both online and offline transactions.
Ensuring usability in terms of holding limits
In our previous blog, we explained that a limit on the amount of digital euros that people can hold would seriously undermine its usability, and therefore attractiveness, especially if that limit is as low as €3,000 and, as opposed to bank deposits, is unremunerated. We explained that this was a clear example of where the ECB and the Commission had chosen to prioritise the interests of the banking sector over those of people.
That the Commission has given considerable weight to the arguments of the banking sector in its proposal is further evidenced by Article 16(2). This article goes as far as telling the ECB what precise considerations the central bank should have in mind when determining the holding limit, and it gives primacy to the concern of financial stability over other considerations, such as the conduct of monetary policy and enabling people to access and use the digital euro.
The proposal should be remedied to reflect the fact that the ECB is the only entity that has the competence to decide on holding limits under the treaties. Moreover, any decision on the level of holding limits is a balancing act between various considerations to be determined by the ECB, which should include the need for access to public money and the results of system-wide stress tests on the banking system’s ability to deal with an increase in digital euros.
Finally, we agree with the ECB’s opinion on the digital euro that the Commission’s proposal should be remedied to remove the outright exclusion of an interest-bearing digital euro, as this may be warranted in the conduct of future monetary policy.
Ensuring access through non-profit/public intermediaries
The digital euro, just as cash, is a public good and should therefore be accessible through public intermediaries or non-profits, such as public authorities or post offices. While we welcome that the Commission’s proposal allows this for people who do not have an existing bank account or for accessibility reasons, Article 14(3) of the proposal should be amended to ensure that everyone can choose this option [6].
One of the main reasons for the decline in cash over the past decade is that banks and payment companies are discouraging cash payments and closing ATMs, which they consider to be unprofitable. Governments have had to step in to ensure continued access to public money – the Dutch government, for example, recently passed legislation to ensure that cash withdrawals remain free of charge. Experience shows that we cannot rely on banks to offer the public good of money. People should not have to wait for governments to step in and force banks to give access to public money, as is the case with cash today.
[1] The Commission’s proposal reiterates this in recital 3.
[2] The Commission’s proposal reiterates this in recital 9.
[3] Recital 70 of the Commission’s proposal.
[4] The Commission’s proposal refers to the term ‘local storage devices’ under Articles 2(15), 34(1)(c), 35(1)(c) and 37(4)(b). The term is, however, not defined under Article 2 of the proposal.
[5] Recitals 34, 35 and 75 of the Commission’s proposal specify this.
[6] Article 14(3) of the Commission’s proposal also stands in direct contradiction with recital 29, which says that it is essential, for ensuring a wide use of the digital euro, that public entities distribute digital euros to: (1) people who do not have a non-digital euro payment account, (2) people who wish to open a digital euro payment account at a credit institution or at another payment service provider that may distribute the digital euro, or (3) persons with disabilities, functional limits or limited digital skills, and elderly persons.