The Digital Euro: Taking a common-sense approach to CBDC

In June 2023, the European Commission proposed a regulatory framework on the “establishment of the digital euro”. This is just the latest in a string of pivotal publications from the European institutions, such as the ECB’s market research and prototyping exercise.

As a leading solution provider in the retail CBDC space, we are happy with the key recommendations made by the Commission, which underlines a common-sense approach for a people-centric design of the Digital Euro.

While the decision whether to go ahead with the Digital Euro has not been made yet, the Commission’s Single Currency Package sets the stage for a more innovative and competitive payment landscape in the future, in which cash, existing private payment instruments, and the new Digital Euro will all play a vital role and complement each other. This is also echoed by the latest BIS survey, in which over “80% of central banks see potential value in having both a retail CBDC and a fast payment system”.

Design Considerations

But let us now take a brief look at the most important design considerations, as put forward by the Commission.

The Digital Euro should become legal tender and be accessible to everyone. This point is crucial for adoption. What use would a CBDC be if only affluent adults could access it? Instead, the focus should be on universal use for anyone, any purpose, any time. It is especially good to see explicit mention of minorities, such as people with disabilities, in the proposal.

Distribution and consumer services will be provided by financial institutions. Clearly, the ECB wants to ensure a successful roll-out, but will not be directly involved in onboarding users. That should be left to the private sector, where commercial banks are expected to supply Digital Euro wallets and services. Furthermore, commercial banks are used to onboard customers, and they already have the necessary capabilities and processes in place. But to bridge gaps in the market coverage, other institutions like post offices could also play a vital role.

The Digital Euro should not bear any interest. This is another characteristic that CBDC shares with cash. If it had negative interest, people would not use it. If it had positive interest, it would become too attractive compared to deposits. Neither of those options seem attractive given the current two-tier financial system.

The Digital Euro should work offline from day one. In 2021, there were 13 million unbanked people in the EU. And that number only includes adult citizens. But what about children, refugees, or tourists? Offline-capable CBDC wallets that can be used independently of bank accounts are an important tool for financial inclusion, and therefore directly benefit the economy. Additionally, offline payments are crucial for resilience.

The Digital Euro should protect privacy. With the European Union having one of the strongest privacy legislations worldwide, it should not come as a surprise that privacy is a cornerstone for the Digital Euro. We believe that a combination of technical and organisational means can provide high degrees of privacy, for example, by keeping KYC (Know Your Customer) data at financial institutions.

The Digital Euro should have limits. For several reasons, the Commission envisions a holding limit to prevent excess flow of deposits into Digital Euro. Enforcing those limits falls within the responsibility of financial institutions, i.e., the organisations issuing and managing wallets.

It should not be programmable money, but provide programmable payments. This did not come as a surprise, because various officials have made their stance on programmable money clear in the past. Programmability, such as the features exhibited by various popular cryptocurrencies, would threaten the stability of the Digital Euro, and risk user acceptance. However, some form of automation should be possible, such as payments that follow certain triggers.

Conclusion

To conclude, we believe that the proposed Digital Euro design has set us on a course for a truly universal, inclusive means of payment. While the concrete implementation will be a tall order, we acknowledge that the above points broadly mirror our learnings from many years of conversations with central banks around the world. Even more so, our Filia solution checks all the boxes due to its token-based, privacy-preserving, and offline-capable architecture. Does this mean we are finally converging on a common-sense CBDC design? We are hopeful.

This post has also been published on LinkedIn.