On July 14, 2021, the European Central Bank (ECB) made a significant announcement regarding initiating the digital euro project. This initiative involves an initial investigative phase spanning 24 months, with a planned conclusion in October 2023. Throughout this period, the ECB has diligently addressed crucial issues related to the design and distribution of the digital euro. The Governing Council, in three progress reports released in September 2022, December 2022, and April 2023, has outlined foundational design choices that have been made. Furthermore, the European Commission has expressed its intention to propose a digital euro regulation during the summer, establishing a Legal Framework for the Digital Euro.
1.    Transitioning from the concept of “digital cash” to the notion of “an electronic means of payment for retail payments.”
In its earlier communications, the ECB linked the digital euro to the concept of banknotes. The primary goal was to provide citizens and businesses access to a digital form of central bank money, especially considering the decreasing use of physical cash. The issuance of a “digital equivalent of euro banknotes” aimed to reinforce the monetary anchor function currently served by physical banknotes.
However, in more recent developments, the mention of banknotes has vanished. The initial progress report now characterizes the digital euro as “an electronic means of payment for retail payments.” This shift in language signifies not only a linguistic change but also underscores the digital euro’s transformation from public money to a mere public means of payment. This distinction is crucial, highlighting the specialization of the digital euro.
It is essential to note that money serves both as a medium for transferring value in the present (payment function) and as a store of value over time (storage function). In contrast, means of payment primarily focus on facilitating transactions with limited storage functionality. Conversely, “near money,” as a third category, emphasizes storing value over time, with a restricted means of payment function.
The final configuration of the digital euro will not only dictate its likeness to the distinct attributes of money, means of payment, or near money. Still, it will also determine its primary competitors among existing monetary objects.
2.    Privacy Alignment: Does the Digital Euro Resemble Private Digital Currencies or Traditional Cash?
Privacy is an aspect where the design of the digital euro may significantly diverge from traditional banknotes. Unlike banknotes, which allow for anonymous payments and value storage, the European Central Bank (ECB) emphasizes that anonymity is not a feasible design choice for the digital euro, given the potential for systematic abuse of illicit activities. However, the level of user data privacy can vary concerning both the Euro system and private intermediaries. In essence, the privacy attributes will shape the degree of resemblance between the digital euro and traditional cash.
       2.1.   Data Privacy within the Euro System
Recognizing privacy as one of the top-prioritized features according to user surveys, the ECB acknowledges its decisive impact on the digital euro’s demand and ultimate success. The ECB is firmly committed to minimizing the Euro system’s involvement in processing users’ data, ensuring that it is designed to prevent the Euro system from deducing the number of digital euros held by individual users or inferring their payment patterns.
Unlike private entities, the ECB has no interest, nor mandate, to engage in business with individual payment data. Its role is to provide the digital euro as a public good. Emphasizing the importance of preventing systematic surveillance of individual citizens’ and firms’ payment behavior by a public institution, the ECB aims to render such surveillance impossible through the design of the system.
Most user and transaction data are intended to be accessible only to private intermediaries for regulatory compliance, with the Euro system retaining access to pseudonymized/aggregate data for digital euro-related tasks such as statistics, research, supervision, and oversight.
However, the precise approach the ECB intends to employ in monitoring compliance with individual user holding limits remains unclear from the progress reports and previous communications. Outsourcing this task entirely to private intermediaries is a potential option, yet the ECB might consider retaining control for operational, legal, or reputational reasons. The pseudonymization of relevant data presents another alternative, and further clarification on this matter may be sought by the ECON Committee.
         2.2.   Data Privacy Concerns with Private Intermediaries Top of Form
Within the digital euro ecosystem, private intermediaries assume a pivotal role as direct counterparts for users. A critical decision that co-legislators must confront pertains to the transparency of user data to these private intermediaries. This decision involves striking a delicate balance between safeguarding users’ privacy interests and rights and minimizing the risk of illicit purposes, such as money laundering, associated with the digital euro.
Irrespective of the chosen option, users will need to undergo identification during the initiation of digital euro usage, a process termed “onboarding” by private intermediaries. However, varying levels of privacy could be applied to users’ payments (transaction privacy):
- The “baseline scenario,” described by the ECB, represents the lowest degree of privacy. In this scenario, the digital euro would be treated as to private-sector digital solutions, like payments with commercial bank deposits. Both personal and transaction data would be fully accessible to private intermediaries to comply with Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) requirements.
- The progress reports do not delve into whether private intermediaries should be permitted to utilize personal and transaction data for business purposes, potentially optimizing their digital euro user-facing services or unrelated services (e.g., mortgages). This aspect requires careful consideration by co-legislators, especially in the context of potential amendments to data protection laws.
The ECB discusses two design options offering a higher degree of privacy for low-value transactions associated with lower risk: the “selective privacy” and “offline functionality” options. Both alternatives aim to provide users with a more cash-like experience, appealing to privacy-sensitive users while mitigating risks of misuse. Co-legislators must define what constitutes a “low-value transaction,” establishing thresholds for transaction limits and overall spending limits over a specified period (e.g., monthly). In a digital euro conference in November 2022, ECB Executive Board Member Fabio Panetta mentioned, as an example, a transaction limit of 50 digital euros and a monthly spending limit of 1,000 digital euros
3.    Developing the Infrastructure for a Digital Euro
The European Central Bank’s (ECB) evolving perspectives on crafting an infrastructure for the dissemination of digital euros to end-users and facilitating settlements in digital euro payments are elucidated. This segment offers a critical evaluation of the chosen design strategies while also shedding light on potential challenges and unresolved queries that lie ahead.
The ECB plans to distribute the digital euro through supervised intermediaries, who will manage user accounts, payments, and security measures. The ECB will oversee the intermediaries and provide a rulebook for the digital euro scheme.
The ECB refines the eligibility criteria for supervised intermediaries participating in the digital euro scheme, limiting it to payment service providers (PSP) by the Payment Services Directive 2 (PSD2). This inclusion extends authorization to e-money and payment institutions, alongside traditional banks, to distribute the digital euro and offer associated services. The potential for amending the PSD2 in the future may influence the determination of entities eligible or excluded from digital euro distribution. The specific criteria for access to the digital euro scheme would be delineated in the scheme’s rulebook, with legislative adjustments likely required to support the ECB’s proposal. These adjustments may encompass amendments to the Settlement Finality Directive, the Payment Accounts Directive, and the PSD2 itself.
       3.1.  Payment and Earnings for Distributing Digital Euro
The payments and earning issues linked with the distribution of the digital euro through supervised intermediaries raise pertinent questions. These intermediaries, entrusted with distributing the digital euro on behalf of the ECB/NCBs, will incur upfront costs to establish interoperable infrastructure aligned with the ECB’s core infrastructure and complying with the prescribed rules, standards, and procedures outlined in the digital euro scheme’s rulebook. This undertaking introduces both initial costs and operational risks for the intermediaries, who will also face competition with the ECB in terms of their private money payment services and deposit collection.
The open question revolves around whether the upfront costs borne by intermediaries will be offset by future business opportunities. The ECON Committee may seek insights from the ECB on its perspective and the current status of its analysis in this regard. A compensation scheme becomes essential to delineate the share of costs to be borne by intermediaries, merchants, the ECB/NCBs, and end-users for the availability of the digital euro. Introducing user fees, especially for basic payment needs, is deemed unfavorable as it could deter consumer adoption and move away from the cost-free nature of cash usage.
The ECB has expressed that basic payment needs, likely aligning with the core digital euro-related services, would be free for private individuals. The willingness of merchants to accept fees hinges on the comparative costs with other digital payment methods and the potential for network effects from investing in new point-of-sale infrastructure for the digital euro. Nevertheless, the majority of costs are anticipated to be shared between the ECB/NCBs and supervised intermediaries, a distribution with direct implications for the ECB’s budget and financial independence.
Additionally, the ECON Committee may inquire about the ECB’s approach to calculating and attributing “seigniorage” resulting from issuing the digital euro. Unlike the physical banknote distribution system, where banks “buy” banknotes from the ECB, the digital euro’s seigniorage system may differ and necessitate careful consideration in its design.
      3.2.  Interoperability
Implementing the digital euro requires the establishment of a legal and technological “core system.” From a legal perspective, this system must guarantee the convertibility of digital euros at par (1:1 exchange rate) to cash and commercial bank deposits, ensuring their interchangeable use. This approach is essential to ensure that the digital euro complements cash, serving as a stable anchor for the financial system. Users should have seamless and frictionless exchanges between digital euros, commercial bank deposits, and cash, mirroring the current system between commercial bank deposits and cash. Consequently, the ECB plans to mandate supervised intermediaries to offer funding and defunding services as a fundamental digital euro-related service, operating 24/7.
The third progress report rightly addresses the international interoperability of the digital euro system, aiming to facilitate cross-border and cross-currency usage. To achieve this interoperability, both technologically and legally, considerations must be integrated into the system’s design at an early stage. The Bank for International Settlements (BIS) has initiated exploratory efforts on the cross-border interoperability of Central Bank Digital Currencies (CBDCs) from different jurisdictions. However, this matter is politically sensitive, requiring decisions on which jurisdictions the euro area wishes to engage with in further exploring cross-border interoperability.
- Implementing the digital euro necessitates the creation of a legal and technological “core system.”
- The system must ensure the convertibility of digital euros at a 1:1 exchange rate to cash and commercial bank deposits, allowing for their interchangeable use.
- This approach is crucial to guarantee that the digital euro complements cash, providing a stable anchor for the financial system.
- Users should experience seamless and frictionless exchanges between digital euros, commercial bank deposits, and cash, resembling the current system between commercial bank deposits and cash.
- The third progress report emphasizes the importance of international interoperability for the digital euro system.
- The goal is to facilitate cross-border and cross-currency usage, requiring early integration of technological and legal considerations into the system’s design.
4.    Conclusion(Legal Framework for the Digital Euro)
Our examination has evaluated key design aspects of the digital euro with a primary focus on legal considerations. The initial section delved into the characteristics and specifications of the digital euro, emphasizing its position between “real” money, a means of payment, and a near-money investment. A notable concern was raised regarding the envisioned remuneration of the digital euro, posing potential complexities and blurring the lines between money and a monetary policy instrument.
The second section explored the design of the digital euro scheme’s infrastructure, crucial for distribution and settlement. While the ECB’s clarification on eligible supervised intermediaries is appreciated, a critical question remains about the compensation structure for intermediaries offering digital euro-related services on behalf of the ECB/NCBs. Systematic analysis of the costs generated for intermediaries, under different scenarios, and clarity on cost-bearing entities is currently lacking.
The third section delved into the legal foundations of the digital euro, distinguishing the roles of the ECB and co-legislators. The paramount objective of ensuring a monetary anchor should guide the design of the digital euro towards a cash-like structure.