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EU officials' enthusiasm for a digital euro is unwavering, but how they get there still remains uncertain as they grapple with what the thresholds for privacy will be. A chief concern is whether a digitalised fiat can maintain the same level of anonymity as its paper-based equivalent, while reconciling this with other significant security requirements, such as fighting money laundering.
Data privacy has, since the beginning of the European Central Bank’s (ECB) investigative work regarding a digital euro, been a major area of contention.
For the EU, data privacy is a top priority in a way that it perhaps is not for China or the US. The EU’s most recognisable piece of legislation is the General Data Protection Regulation (GDPR), which has been replicated all over the world and is regarded as highly influential.
For example, Canadian politician René Villemure told his country’s parliament last week: “GDPR is becoming the standard to follow when it comes to privacy, because it is the legal standard with the clearest objectives and the most binding application."
It is perhaps this reputation that causes the EU so much unease when it comes to data privacy and the issuing of a central bank digital currency (CBDC).
“I’m convinced that privacy is most important to acceptance for customers of the digital euro,” said Christian Lindner, Germany’s finance minister.
The digital euro can only be accepted by people if it is comparable, privacy-wise, with cash transactions, he said. “We have to fight money laundering, and avoid financing of terrorism of course, but if there is a significant difference between cash and transactions by digital euro then I think that people won’t accept it.”
Lindner’s views contrasted with that of Christine Lagarde, the ECB’s president, who instead said that the digital euro should have similar privacy rules to those of current electronic transactions.
The EU really needs to address privacy concerns, admitted Mairead McGuinness, the European Commission’s financial services commissioner. “But there are criminals who really want privacy as well. I think we have to be mindful and find a way that that doesn’t happen.”
McGuinness suggested that if the EU allows for a design that has a flaw somewhere that allows money laundering to flourish, then it would be failing citizens who want privacy in their transactions.
The right balance
“We don’t want a dirty digital euro,” said McGuinness. “We need to move away from this idea that big brother is watching us and that this digital euro is part of that.”
Consumers are reasonable and appreciate the need to prevent criminal activity, said Monique Goyens, the European Consumer Organisation’s director general.
“We think there should be the same approach as there is for cash where there is no check on low-value transactions,” she advised.
Goyens suggested that on higher value transactions, data protection principles should be applied, including data minimisation, a principle in the GDPR ruling that data collected and processed should not be held or further used unless this is essential for reasons.
Violaine Clerc, executive secretary of the Financial Action Task Force (FATF), agreed. “When we have anonymity, portability, and mass adoption, it is also very attractive for criminals, and we have to protect citizens from these criminal activities.”
Data privacy and anti-money laundering rules are aimed in the same direction, protecting fundamental rights, she said.
“As it is a currency, anti-money laundering and terrorist financing rules will apply, as they do to cash transactions,” said Clerc. “I think we are in an area and an environment where we can benefit from technology and innovation to facilitate the traceability of a transaction without putting in danger the privacy rights.”
If the EU works together, then it can create a solution where there is privacy, not anonymity, for users of the digital euro, Clerc said, optimistically. For example, by only collecting data that is regarded as risky.
“At the same time, we protect privacy as there is a need to know basis, which should be the condition to assess the data,” she said. “This should also be complemented by protection that is ensured by technology, so only the person and the authority has access to the data.”
McGuinness pointed out that it is likely consumers have already given away data when making a digital payment.
“I think we’ve all given away much more information that we think we have,” said McGuinness.
At some point, however, citizens may come to better understand this. “I hope that our proposal on open finance will kick start that conversation.”
In her speech to the conference, Lagarde appeared resolute that privacy would have to be a trade-off.
“We seek to ensure high standards of privacy for digital euro users, but full anonymity, such as offered by cash, does not appear a viable option in my opinion.”
Lagarde argued that it would contravene other public policy objectives such as ensuring compliance with anti-money laundering rules and combating the financing of terrorism.
“And it would also make it virtually impossible to limit the use of the digital euro as a form of investment, for example via holding limits or tiered remuneration, for which identities of users need to be known.”
Political hot potato
Although the digital euro is a creation of the ECB, and, ultimately, a monetary policy, in theory the buck stops with Lagarde and other ECB senior officials, such as Fabio Panetta.
However, it has become an increasingly political issue for the EU, as evidenced by interventions from member state governments, such as Germany, as well as members of the European Parliament, who, for example, were critical of the ECB’s decision to involve Amazon in its testing phase.
Once the European Commission releases its regulatory response, and the European Parliament and Council begin to scrutinise, then the finer issue of the implementation, such as privacy and thresholds, are likely to generate intense debate.
Beyond the EU’s political class, the payments industry has long accepted the digital euro as inevitable, but sources varying from those working in digital payments to those striving for access to cash are sceptical about its necessity.
Meanwhile, some feel that it is a sign of too much payments legislation coming at once, something that was voiced by Martina Weimert, the chief executive of the European Payments Initiative.
“We will lose the battle if we do everything at the same time,” she warned, noting other legislation such as the instant payments package that was recently introduced by the commission.
