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The European Central Bank (ECB) is inviting technology experts to take part in online technical talks to explore options for the design of a central bank digital currency (CBDC), it has announced.
Although a slow process, the digital euro has been a headline grabber over the past year as Europe’s banks and payment service providers question how they will need to respond to the advent of a retail CBDC for the eurozone.
If market participants wish to join in this project, they need to have submitted a proposal, focusing on one of the four topics, by November 30.
The Digital Euro Association (DEA), a think tank headquartered in Frankfurt, has told VIXIO that it plans on making a proposal.
“We, as the DEA, will apply for the Digital Euro Expert Talks as we do have excellent experts researching the design of a digital euro,” said Jonas Gross, chairperson of the DEA and a project manager at Frankfurt’s School Blockchain Centre.
The green light for investigating the digital euro came in July. In deciding to progress to the next stage with its digital euro project, the ECB referred to its new two-year initiative as “the investigation phase”, as well as the “start [of] the digital euro project”.
The digital euro’s design will be based on user preferences and technical advice from merchants and intermediaries, the ECB has stated.
As the Frankfurt-headquartered central bank pushes ahead in reaching out to the market for experts in the field to aid its design plans, it has also provided details on the format of its planned collaboration.
These talks will be held in closed sessions with members of the ECB’s digital euro project team and will be structured as a 20-minute presentation followed by a question and answer session, lasting 45 minutes in all.
“Even if it is still quite early, a digital euro has to be secure, convenient, cheap, and generally usable without a high entry barrier,” said Gross. “Further, it should enable a high degree of data privacy, while complying with regulation.”
Addressing the CBDC challenge
The ECB has requested expertise across four key topics, which can broadly be described as: privacy; hoarding prevention; offline security; and e-wallets.
Privacy: One area of interest is how to scale privacy-preserving technology for use in retail payments, while also ensuring traceability. In the ECB’s public consultation on the digital euro, launched last October, privacy came out top as a key concern among respondents.
Now, the ECB is looking for answers as to how technologies that enhance privacy can work alongside those for user authentication for payments solutions.
Hoarding: Of concern for the ECB is the hoarding of the digital euro once it goes into circulation. It is requesting advice on how to prevent and limit the impact of the hoarding of large sums of money in a payment wallet or account. It also wants to consider the usability and uptake of a payment solution — both in normal times and during times of financial distress.
For example, hoarding of physical cash typically occurs in times of a financial crisis as consumers concerned with the financial stability of their bank take their money out to protect it. A potential question the ECB may want support on, is how to try to balance limiting hoarding of the digital euro on the one hand, and the desire of users to protect their savings in times of crisis. If customers are unable to access their savings, it could lead to social unrest.
Commercial banks have also long fretted about the possibility of bank runs due to retail CBDCs, as many will perceive it as a low-risk alternative to a savings account even in normal times. Some banks believe this could lead to a dramatic decline in customer deposits they hold. However, some also argued that CBDCs are simply a natural progression, comparing them to that of instant payments, whereby financial institutions have been able to find new opportunities from the modernisation.
Offline: The ECB wants to investigate the security of offline payment solutions that are not linked to any external system for conducting consecutive payments. “How can we make the top-up process and the use of the secure element more convenient?” the ECB asks.
E-wallets: Many wallets are stored value services whereby users can fund and defund these accounts from their bank account or card. In a digital euro world, what would be the process of topping up, funding and defunding digital wallets or accounts for the user and account-based payment solutions? The ECB wants to ensure it is easy for EU citizens to fund and defund a payment wallet, both manually or automatically.
New Working Group
On Monday (October 25), the ECB also announced the final list of its 30 member Digital Euro Market Advisory Group. Experts on the panel are primarily from the leading banks and payment processors including Banque Populaire, BBVA, CaixaBank, Deutsche Bank, Intesa Sanpaolo, Nexi, Nordea, SIBS , Société Générale and Worldline. There is also strong representation from bank and payment trade associations, include those of Germany, Italy, Netherlands, and the European Payments Council.
This group will help advise the Eurosystem on the design and distribution of a potential digital euro from an industry perspective, as well as help with determining the potential value that a digital euro could drive across the payments ecosystem.
“I am pleased that many high-quality experts from the private sector are willing to contribute to the digital euro project”, said ECB Board Member Fabio Panetta, Chair of the High-Level Task Force. “Their expertise will facilitate the integration of prospective users’ and distributors’ views on a digital euro during the investigation phase.”
The new advisory group will meet at least quarterly, with the first meeting help in November.
So will the ECB issue a digital euro eventually?
All of the indicators so far suggest that this is extremely likely. The European Commission has declared that it will introduce legislation by 2023 in this area, and it is unlikely that the ECB would want to fall behind other economies, including the UK and China, the latter of whom is already at the testing stage with its CBDC.
In addition, eurozone central banks including Banca d’Italia and Banque de France have carried out CBDC tests, with Banca d’Italia carrying out a cross-border proof of concept with the Arab Monetary Fund, and Banque de France carrying out several CBDC tests during the course of this year and the last.
"Even if ECB hasn't said, I think we will now see it happen one day,” said one source familiar with the project, who noted that the ECB is making steps in the right direction.
In particular, our source praised the fact that the ECB has opted to be technologically neutral. “It is impressive to see how sophisticated they have been. This was a really good decision, and wasn't a big surprise."
