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A new report on the digital euro project outlines how the European Central Bank (ECB) is designing high privacy standards for online and offline digital payments to mimic cash transactions, developing a methodology for calibrating digital euro holding limits and contributing technical input to legislative discussions with European co-legislators.
The new report from the ECB covers the digital euro preparation phase, which began on November 1, 2023 and aims to establish the foundational elements for a potential digital euro issuance.
It provides fresh detail on the digital euro's design, including specifics on functionality and technical features. It also gives payment service providers clear guidance on what they need to do to be in compliance with data protection regulations.
“The digital euro preparation phase is progressing well and we support the ongoing democratic debate on the legal framework for the digital euro,” said executive board member Piero Cipollone, who chairs the high-level task force on the digital euro.
“The digital euro is a common European endeavour. As such, we will continue engaging with all stakeholders, including the European public, to ensure that it is successful and benefits us all.”
One step forward…
Although the preparation phase may be making good progress, this does not mean that the political questions are any closer to being answered.
At a recent conference, a banking industry insider joked to Vixio that “maybe they can delay it … until 2040”, echoing the lack of enthusiasm throughout the payments ecosystem about the possible issuance of a digital euro.
Nevertheless, there is a consensus that the project will reach the finishing line. Another market participant recently told Vixio, "too much has happened for the EU to ditch the digital euro. It’s too much money lost.”
Key developments in digital euro design
The ECB’s report highlights advancements in the digital euro's design, including an offline functionality that ensures personal transaction details remain private between users in physical stores and peer-to-peer transactions.
For online transactions, the ECB has agreed on technical features like pseudonymisation, hashing and data encryption to enhance privacy beyond current standards.
Payment service providers will access only necessary personal data for EU regulatory compliance, with any commercial data use requiring explicit user consent and oversight by independent authorities ensuring the ECB's compliance with data protection regulations.
The offline capability for the digital euro will enable users to pre-fund their accounts and conduct transactions without needing an internet connection. This involves direct payments between users' offline devices, such as mobile phones or payment cards, without intermediaries.
Technical investigations are assessing tools for settling offline transactions directly on users' devices, the ECB said, adding that its focus is on ensuring secure and user-friendly execution, including funding and defunding offline wallets and implementing anti-money laundering checks.
Solutions may include battery-powered or non-powered smart cards communicating via a bridge device.
Holding limits and monetary policy
To maintain financial stability and effective monetary policy transmission, the digital euro will not be remunerated and will be subject to holding limits.
Users will be able to link their digital euro wallets to commercial bank accounts, allowing seamless payments without pre-loading funds.
The ECB has said that it is developing an adjustment method for these holding limits, incorporating a thorough monetary and economic assessment.
This involves data collection and dialogue with various stakeholders, including consumers, merchants and financial institutions.
Initial engagements have begun, the ECB said, with ongoing consultations planned to refine the methodology.
Rulebook and the legislative process
The Digital Euro Rulebook Development Group has reviewed the initial draft rulebook, which standardises digital euro payments across the euro area.
The final version, expected by late 2024, will cover user identification, authentication and infrastructure requirements.
The ECB has also issued five calls for applications to establish framework agreements with external providers for digital euro components and services, aiding in the finalisation of the digital euro's technical design.
The central bank added that throughout legislative discussions it has offered technical expertise to European institutions, including analysing the euro retail payments market, conducting feasibility studies on multiple digital euro accounts per user, and developing an inclusive digital euro app.
