With its second progress report in the preparation phase, the European Central Bank (ECB) is moving on with its plans for the digital euro and offering an overview of its ongoing efforts. Discussions on holding limits, user privacy, and operational frameworks are becoming more prominent as crucial choices about the CBDC are anticipated in late 2025.
Since May 2024, we have:
Assessed user needs for the digital euro’s design Made progress on the selection of digital euro component providers Continued developing the digital euro rulebook
Read our latest progress report https://t.co/YA1hzZq2q1 pic.twitter.com/6TxhcJjqAb
— European Central Bank (@ecb) December 2, 2024
Developments and Obstacles during the Midway Stage
To set the stage for the possible introduction of the digital euro, the Eurosystem began a two-year preparatory phase in November 2023. This stage, which comes after previous research and design phases, is the middle of a larger endeavor to update Europe’s payment infrastructure while maintaining the financial system’s soundness.
The creation of a Digital Euro Rulebook and a number of other operational papers are important components of this phase. Standardizing regulations among member states and offering a clear implementation path are the goals of these resources. Addressing different design and operational difficulties is the responsibility of seven workstreams that involve national central banks and market players. The ECB is getting closer to making a formal decision on the CBDC’s future, and the next progress report, which is due in July 2025, will provide more details.
Despite advancements, a number of issues still exist. Among them, stakeholders have paid close attention to the arguments surrounding holding restrictions and the complexities of offline functioning.
The Argument About Setting Boundaries
The amount of digital euros that people and companies should be permitted to own is one of the most controversial topics. The conflict between systemic stability and usability is highlighted by this discussion.
Citing convenience and the necessity to serve the unbanked, consumer organizations have pushed for increased holding limits. For instance, the consumer advocacy group AGE recommended a cap of €3,200, which is around the average monthly wage in the EU. The possibility of progressively raising the restriction over time is part of their plan.
However, a far lower maximum of €500 per individual has been suggested by the European Association of Co-operative Banks (EACB). The banking industry’s stance that the digital euro should largely serve as a payment mechanism rather than a store of value is supported by this number. Additionally, banks are worried that high holding restrictions might cause the financial system to become unstable by taking deposits away from more established banks.
As a compromise, the ECB has suggested a “reverse waterfall” system. Any extra digital euros over the holding limit would be immediately transferred back into the associated fiat bank accounts via this mechanism. Although this strategy reduces the danger of excessive accumulation, consumer groups have criticized it for being too complicated and perhaps having an adverse effect on privacy.
A Key Component of the Digital Euro is Privacy
A crucial component of the architecture of the digital euro is still privacy issues. The digital euro would provide a higher degree of anonymity than current commercial payment methods, the ECB has underlined on several occasions.
Options for cash-like privacy features are being investigated. These would make it possible for consumers who have stricter privacy preferences to transact without collecting too much data. In February 2024, Piero Cipollone, a member of the ECB Executive Board, reaffirmed this promise, emphasizing how the digital euro may establish a new benchmark for privacy in the world of digital payments.
According to the research, these privacy measures would address more general worries about data abuse and spying in addition to boosting consumer trust. Yet, reaching this objective requires negotiating a challenging technological and legal landscape, especially when it comes to guaranteeing adherence to anti-money laundering and counter-terrorism funding regulations.
Strengthening Europe’s financial sovereignty is a key goal of the digital euro program. The ECB hopes to promote competition in the area and lessen reliance on non-European service providers by establishing a strong digital payment infrastructure.
According to the ECB, payment service providers (PSPs) would be able to expand and develop their services thanks to the digital euro. PSPs might provide new services that are suited to the requirements of European businesses and customers by incorporating the digital euro into the current payment systems. This strategy makes use of local infrastructure and knowledge to support the overarching objective of building a more robust and effective financial ecosystem.
The ECB has been interacting with technical service providers and industry stakeholders to help realize this ambition. Five work packages, totaling up to €1.1 billion, were available for bid in a January 2024 procurement procedure to aid in the establishment of the digital euro. The deployment of secure components on mobile devices and integration at points of sale are two important issues that these initiatives seek to address.
Offline Deals: Overcoming the Digital Gap
Another objective is to make sure that everyone in society, especially those without reliable internet access, can continue to use the digital euro. Despite its technological difficulties, offline functionality is seen as a crucial facilitator of inclusion.
Offline solution research has concentrated on creating standards for point-of-sale terminals and utilizing security features in mobile devices. In order to make the digital euro a practical substitute for underbanked and unbanked groups, this project aims to digitally duplicate the simplicity and security of cash transactions.
The ECB is committed to resolving these obstacles, as seen by its continued interaction with manufacturers and standard-setting organizations, even though specifics are still lacking. In terms of increasing the digital euro’s utility and attractiveness, achieving offline functionality may be innovative.
Legal Obstacles and Involvement of Stakeholders
The digital euro’s legislative framework is still being developed. Stefan Berger’s continued role as Rapporteur offers some stability even if the European Parliament has resumed its debates after the 2024 elections.
To facilitate the adoption of the digital euro, the ECB has underlined the importance of unified and transparent regulation. This involves discussing issues like holding limits, privacy guidelines, and the allocation of duties between national central banks and the ECB.
The ECB’s strategy continues to place a strong emphasis on stakeholder interaction and public communication. Important elements of the digital euro’s design have been influenced by attempts to get input from companies, consumers, and trade associations.
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