1.     Introduction

Central bank digital currency (CBDC) refers to a digital representation of fiat currency, tied to the sovereign currency of the issuing nation. While governments acknowledge the crucial role of legal considerations in the development of digital currencies, they are only beginning to grapple with the regulatory design, leaving a legislative gap for governing CBDC.

Numerous Frameworks for CBDCs need addressing, ranging from tax implications and privacy concerns to data protection, contract law, payment systems, and international law. The challenge is exacerbated by the international nature of digital currencies, which lack corresponding global legal frameworks akin to physical money. Uncertainties persist regarding the potential replacement of physical notes by CBDC or the coexistence of CBDC with cash and other forms of digital currency and crypto assets.

In the realm of digital currencies, the recognition of legal considerations by governments marks a critical juncture in their understanding. However, the regulatory design for central bank digital currencies (CBDC) is still in its nascent stages, resulting in a noticeable legislative void that is essential for governing the deployment and operation of CBDC.

The legal landscape for CBDC is vast and complex, encompassing various facets such as tax implications, privacy, data protection, contract law, payment systems, and international law. The challenge is compounded by the inherent international nature of digital currencies. Unlike physical money, which operates within established global legal structures, digital currencies lack a corresponding framework, posing significant legal hurdles for their seamless integration into the international financial system.

One of the central issues pertains to the uncertain role of CBDC in physical notes and other existing forms of currency. The question of whether CBDC will replace physical currency entirely or coexist alongside cash and other digital assets remains unanswered. This uncertainty adds another layer of complexity to the legal considerations surrounding CBDC, as policymakers grapple with the need to establish a framework that accommodates these digital currencies within the broader financial landscape.

As governments and central banks navigate these legal intricacies, the development and adoption of CBDC will likely necessitate a comprehensive and adaptable legal framework. Addressing these legal challenges is crucial not only for the effective implementation of CBDC but also for fostering trust and confidence in the evolving landscape of digital currencies.

2.     Governance and Regulatory Surveillance

Effective legal and regulatory oversight is paramount in navigating the complexities associated with the adoption of Central Bank Digital Currencies (CBDCs). The establishment of a regulatory framework becomes crucial to delineate responsibilities and address various aspects such as monetary policy, consumer protection, and international remittances. As CBDCs have the potential to significantly alter the global financial landscape, ensuring a robust regulatory environment is imperative to mitigate risks and maintain stability.

In the absence of a universally agreed-upon framework, the current landscape remains uncertain. Countries entering the early stages of CBDC adoption face unique challenges, both in terms of regulatory coordination and technological integration. Harmonizing diverse regulatory approaches becomes essential to promote consistency and foster international cooperation in the evolving CBDC ecosystem.

The exploration of CBDCs by 130 countries underscores the need for a comprehensive regulatory response. The interactions between these countries may necessitate the creation of a new global digital money network to facilitate seamless transactions and ensure interoperability. The regulatory challenges extend beyond domestic considerations, requiring a collaborative approach on the international stage to address the intricacies of cross-border transactions and regulatory harmonization.

The collaboration among central banks, exemplified by the joint efforts of Canada, Japan, Switzerland, and England in May 2023, signifies a proactive approach to policy objectives related to CBDC adoption. This collaborative spirit provides a foundation for policymakers to collectively address challenges, share insights, and work towards establishing a coherent global regulatory framework for the evolving landscape of digital currencies.

            2.1.    Legal Classification of Digital Currency

Currently, in the majority of countries, Central Bank Digital Currency (CBDC) lacks legal tender status as per existing laws, contributing to a somewhat ambiguous legal framework for digital assets and CBDCs. Digital assets, which can be either tangible or intangible, pose unique challenges within this legal landscape.

While the legal framework for physical money is well-established, digital currency presents a distinct paradigm. Unlike tangible money, digital currency lacks inherent value unless it is converted into real assets backed by a federal reserve. Unlike cash, which citizens can spend freely, the programmable nature of digital currencies introduces the potential for restrictions. The prospect of canceling digital money raises concerns about civil liberties and the concept of public ownership.

The specific form that CBDC will take remains uncertain, including whether it will be token-based or account-based. Critical decisions are pending regarding its use for consumers and businesses in the retail sector or for wholesale purposes by governments and financial institutions. These uncertainties prompt inquiries into the role of governments in regulating and overseeing CBDC, raising important questions about the extent of their control in this evolving financial landscape.

• Security and Consumer Protection:

The decentralized nature of some digital currencies poses challenges for consumer protection. Legal frameworks aim to establish security standards for digital money providers and protect consumers from fraud, hacking, and other risks associated with the digital economy.

• Financial Stability:

Central banks and financial regulators closely monitor the impact of digital money on monetary policy and financial stability. Legal provisions may be introduced to mitigate systemic risks and ensure the resilience of the financial system.

            2.2.   Establishing the Requisite Blockchain Infrastructure

Establishing the necessary blockchain infrastructure to support a Central Bank Digital Currency (CBDC) requires careful consideration of interoperability with existing forms of money and payment systems. While the coexistence of a new digital payments system with other digital assets like stablecoins and cryptocurrencies remains uncertain, various models, including hybrids or systems involving financial intermediaries, are under consideration.

In contrast to cryptocurrencies utilizing public distributed ledger technology, CBDCs operate on permissioned blockchains, providing the central bank with singular control over currency issuance. The exploration of CBDCs is motivated by the need to regain control over unregulated cryptocurrencies and address their potential to destabilize conventional financial systems.

To create the requisite blockchain infrastructure for a CBDC, a central bank would need to leverage decentralized cryptography, potentially collaborating with the private sector, major tech companies, and even commercial banks. The European Central Bank currently favors a hybrid model, combining digital currencies with cash and existing digital assets.

Key considerations in building a CBDC ecosystem include

• Defining the legal nature of public-private partnerships
• Determining which services to procure
• Assessing available digital products and solutions
• Allocating the costs of blockchain development
• Establishing interfaces with existing digital payment systems.

The decision on whether central banks or the private sector will lead in defining the scope and uses of CBDC technology necessitates the development of new public policy rules and objectives.

The resolution of legal issues and policy choices surrounding CBDCs will require collaboration among a wide range of private and public stakeholders. The ultimate design of CBDCs holds the potential to impact cross-border business transactions, potentially prompting revisions to established business rules such as the Uniform Commercial Code.

3.     Security Concerns in the Realm of Digital Currencies

Detractors argue that the vulnerability of a centralized digital currency to hacking is a significant drawback. This vulnerability is especially pronounced when security protocols are weak or outdated, making the system easily exploitable. Additionally, an unreliable network infrastructure could lead to slow transaction processing or, in the worst-case scenario, system outages.

The Federal Reserve faces a range of challenges in this context, including:

• Technical infrastructure difficulties associated with internet connectivity, interoperability with existing systems, and the looming threat of cyber-attacks.
• Ensuring the stability of the digital currency to guard against potential vulnerabilities and threats.
• Implementing advanced encryption and authentication protocols to prevent unauthorized access to Central Bank Digital Currency (CBDC).
• Guaranteeing the overall security of digital wallets.
• Addressing the availability of the infrastructure 24/7.
• Mitigating the risk of human error, particularly in cases where individuals forget passwords.

Security breaches pose a substantial risk to the entire CBDC system and, by extension, financial stability. The implications of such breaches extend to the technical architecture of a CBDC payment system and may necessitate the formulation of relevant legislation to address these concerns.

4.     Navigating the Intersection of Privacy and Transparency in Central Bank Digital Currencies

The assertion that a Central Bank Digital Currency (CBDC) could grant governments the authority to monitor and regulate transactions prompts a critical examination of the evolution of anti-money laundering (AML) legislation. While the digital ledger’s transparency, accessible to the central bank, may enhance the detection and investigation of suspicious activities, concerns arise regarding the potential misuse by less scrupulous governments.

The widespread adoption of CBDCs introduces a complex dynamic where the anonymity inherent in a purely digital currency could facilitate criminal activities such as money laundering and terrorist financing. This raises questions about the role of the Financial Action Task Force (FATF), the global watchdog for money laundering and terrorist financing, necessitating a reassessment of its functions in light of evolving digital currencies.

For retail CBDCs to ensure privacy, a dedicated Federal Reserve privacy protocol becomes imperative. However, the relationship between privacy and AML measures is intricate and contingent on specific design features. While instilling confidence in the public necessitates privacy checks in a CBDC, there exists a concurrent desire to maintain anonymity for small transactions in the retail version.

To achieve privacy in retail CBDCs, the central bank must implement a comprehensive privacy protocol, possibly integrated with wallets, user interfaces, or mobile applications. Striking a legislative balance becomes a nuanced challenge, as these protocols must offer a degree of anonymity akin to cash transactions while still adhering to Know Your Customer (KYC) and AML regulations. This delicate equilibrium reflects the evolving landscape of digital currencies and the imperative for legislative frameworks that navigate the complex interplay between privacy and transparency.

5.     Systemic Risks in the Digital Currency Landscape

The policy conundrum extends beyond the binary choice of paper money versus digital forms, requiring a regulatory framework for digital money that explicitly endorses particular digital assets. Addressing the programmability of digital currencies becomes crucial to avoid ambiguity between cryptocurrencies and Central Bank Digital Currencies (CBDCs).

Given the central role of currency issuance in any economy, the policy challenge involves assessing the potential systemic risks associated with CBDCs. A CBDC system failure could have far-reaching consequences, disrupting the entire financial system. Policymakers must scrutinize whether CBDCs might contribute to contagion or financial market failure, considering:

• The systemic risk stems from technology failures within the central bank server system.
• The potential ramifications of cyber-attacks, technical malfunctions, or other technological issues.
• The security measures are essential for ensuring the resilience of the CBDC system.
• The establishment of a comprehensive disaster recovery plan.

Concerns also revolve around the displacement of bank deposits by CBDCs, potentially leading to a bank run. Moreover, as CBDCs possess global characteristics and are intended for international remittances, addressing their connectivity across jurisdictions for wholesale and cross-border transactions becomes paramount.

Ongoing pilot schemes exploring wholesale CBDCs for cross-border payments highlight the necessity of broadening access to central bank systems, fostering collaboration with a wider array of stakeholders. Realizing these efforts requires enhanced alignment of regional, national, and international governance procedures.

The current global legal framework for CBDCs is marked by uncertainty and demands standardization to unlock the full potential benefits of CBDC adoption. Policymakers must remain vigilant to emerging systemic risks and continuously refine regulatory frameworks to ensure the stability and efficacy of the evolving digital currency landscape.

6.     Conclusion(Framework for CBDCs)

The journey towards adopting Central Bank Digital Currencies (CBDCs) necessitates a delicate balance between innovation and risk mitigation. As policymakers navigate the complexities of regulating digital money, the critical considerations encompass not only the choice between paper and digital currency but also the endorsement of specific digital assets and the clear distinction between various forms of digital currencies. Addressing the potential systemic risks associated with CBDCs is paramount, encompassing concerns about technological failures, cyber threats, and the displacement of traditional bank deposits. The interconnected nature of CBDCs on a global scale further underscores the need for standardized legal frameworks and enhanced international collaboration. The ongoing evolution of CBDCs underscores the importance of adaptability in governance procedures, ensuring that the digital currency landscape continues to advance with resilience, security, and a commitment to global financial stability. These were some of the Legal Framework for CBDCs.

Inevitable in their adoption, Central Bank Digital Currencies (CBDCs) present a host of potential advantages. Advocates emphasize the enhanced speed and efficiency of payments, along with the prospect of greater financial inclusion for marginalized communities. The perceived key role of CBDCs in combatting financial crime and money laundering underscores the appeal of improved control and monitoring powers for authorities.

Additionally, CBDCs are positioned as a strategic tool to enable sovereign currencies to compete effectively with unregulated cryptocurrencies and other digital assets. Proponents argue that this competition would not only bolster financial stability and consumer protection but also mitigate macroeconomic volatility.

However, transitioning to a cashless future raises legitimate concerns, particularly regarding privacy and potential threats to civil liberties. Acknowledging the considerable technical and infrastructural challenges, stakeholders urge central banks to exercise caution regarding emerging cybersecurity risks.

In an era where cash is losing relevance, central banks perceive CBDCs as an opportunity to reclaim their prominence. By providing a platform for central banks to assert influence over monetary and fiscal policy, CBDCs offer a crucial foothold in a period of upheaval for traditional financial systems.

Recognizing the constraints and embracing innovative solutions are imperative for central banks as they navigate the role of promoting financial innovation through CBDCs. The Federal Reserve, in particular, must remain mindful of public policy objectives to deliver a digital currency that caters to the needs of the general public, businesses, and financial institutions.

The stakes are high, as the failure to get CBDC implementation right poses a threat to international monetary and financial stability. Successful adoption hinges on decisive decisions and agreements forged by governments, financial regulators, and relevant stakeholders. While governments acknowledge the critical role of the law, they are only beginning to grapple with the intricacies of regulatory design.

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Central Bank Digital Currencies (CBDCs) represent a novel form of digital currency currently being introduced by central banks. An essential aspect to consider is the integration of CBDCs within the Anti-Money Laundering (AML) framework and their intersection with the evolving AML solutions adopted by banks. AML regimes are designed to safeguard the integrity of the financial system by thwarting activities such as money laundering and the financing of terrorism. This article delves into the intricate relationships between AML laws and CBDCs, highlighting potential impacts and challenges that may arise from their coexistence.

1.     What are Central Bank Digital Currencies (CBDCs)?

Central Bank Digital Currencies (CBDCs) represent digital counterparts to a nation’s fiat money, issued and regulated by the central bank. The design of CBDCs prioritizes security, accessibility, and efficiency. These digital currencies are categorized into retail CBDCs, accessible to the general public for everyday transactions, and wholesale CBDCs, reserved for financial institutions for interbank transactions.

The introduction of CBDCs offers numerous advantages, including cost-effective and faster transactions, enhanced financial inclusion through access to digital payment infrastructure, and more efficient implementation of monetary policy. However, alongside these benefits, certain challenges must be addressed.

Privacy concerns arise due to the inherent nature of digital transactions, as the digital trail left by CBDC transactions may pose risks to personal information. It is imperative to establish measures to counter cybersecurity risks, protecting the CBDC ecosystem from potential threats such as fraud and hacking. Additionally, operational scalability is a critical consideration in handling the anticipated surge in transaction volumes as CBDCs gain widespread usage.

2.     Mitigating Money Laundering Risks through CBDCs

Combatting money laundering through the use of Central Bank Digital Currencies (CBDCs) is a potential avenue, leveraging their digital nature to enable more transparent transaction tracking. The incorporation of blockchain technology, a common feature in CBDC systems, provides an audit trail and immutable record of transactions, facilitating the detection of suspicious activities. Furthermore, CBDCs can enhance Anti-Money Laundering (AML) solution capabilities for banks by offering automated transaction monitoring, real-time reporting, and data analytics to identify patterns associated with illicit financial transactions. It is crucial, however, to systematically address the specific risks and vulnerabilities inherent to CBDCs.

Despite the promising advantages of using CBDCs to combat money laundering, there are inherent risks that necessitate careful consideration. The digital nature of CBDC transactions, while enhancing transparency, also raises concerns about privacy and the potential compromise of sensitive information. Moreover, the reliance on blockchain technology, while providing an auditable record, requires robust cybersecurity measures to protect against hacking and unauthorized access. Striking a balance between the benefits of transparency and the need for privacy, as well as implementing robust security protocols, is essential to ensure that CBDCs effectively contribute to the fight against money laundering while mitigating associated risks.

3.     Establishing Regulatory Guidelines for CBDCs and Ensuring AML Adherence

Both international and national regulatory bodies should prioritize the establishment of regulatory frameworks for Central Bank Digital Currencies (CBDCs) and Anti-Money Laundering (AML) compliance, particularly concerning AML solutions for banks. These regulatory entities actively engage in discussions and formulate recommendations to address regulatory challenges, recognizing the potential impact of CBDCs on financial systems. The Financial Action Task Force (FATF), a global standard-setting organization, plays a crucial role in crafting AML laws and advising countries on regulating virtual assets like CBDCs. To mitigate the risks of money laundering and terrorist financing associated with CBDCs, nations should adhere to the fundamental principles and actions outlined in the FATF’s recommendations, fostering a regulatory environment that emphasizes responsibility, transparency, and the prevention of illicit financial activities.

Nevertheless, the approaches adopted by different countries to govern CBDCs and ensure AML compliance may vary. Some nations, acknowledging the unique characteristics and potential risks of CBDCs, may opt to enact specific laws and regulations tailored to these digital currencies. These regulations might encompass aspects such as customer due diligence (CDD), transaction monitoring, reporting requirements, and compliance obligations for CBDC stakeholders. Conversely, other countries might choose to adapt their existing AML frameworks to incorporate CBDCs seamlessly. This strategy leverages established AML rules and methods, ensuring that CBDC participants, including central banks, financial institutions, and technology providers, adhere to consistent AML regulations and obligations.

Given these regulatory requirements, stakeholders in the CBDC ecosystem play a pivotal role in ensuring AML compliance. Central banks, acting as both issuers and regulators of CBDCs, must implement robust AML rules and procedures. Financial institutions engaged with CBDCs should integrate AML controls into their operations, employing heightened due diligence and transaction monitoring to identify and report suspicious activities. Additionally, technology providers within the CBDC ecosystem must develop identity verification tools and advanced transaction monitoring systems to facilitate AML compliance. By embedding AML regulations into their products and services, technology companies contribute to creating a secure and compliant CBDC environment.

4.     Utilizing Technology to Enhance AML Measures in Central Bank Digital Currencies (CBDCs)

Enhancements in technology, coupled with advanced Anti-Money Laundering (AML) solutions tailored for banks, can fortify the AML efforts within Central Bank Digital Currency (CBDC) systems. Artificial intelligence (AI) and machine learning algorithms play a pivotal role in refining risk-based AML approaches and facilitating the detection of suspicious patterns and behaviors. Transaction monitoring systems powered by artificial intelligence can efficiently identify anomalies, flag high-risk transactions, and reduce false positives. Collaborative initiatives between the public and private sectors, involving the exchange of knowledge and best practices, contribute to enhancing the effectiveness of AML measures within the CBDC ecosystem.

Sanction Scanner provides state-of-the-art AML tools that can empower CBDCs in their fight against financial crimes. Offering comprehensive AML solutions, including transaction monitoring, customer due diligence, risk assessment, and sanctions screening capabilities, Sanction Scanner enables proactive identification and prevention of potential threats related to money laundering, terrorist financing, and other illicit activities within CBDC systems. By integrating Sanction Scanner’s AML products, CBDCs can leverage cutting-edge technologies and algorithms for real-time transaction monitoring, ensuring compliance with AML regulations and adding layer of protection. This utilization of AML tools from Sanction Scanner not only enhances CBDCs’ AML capabilities but also reinforces regulatory compliance, contributing to the overall integrity and reliability of the digital currency ecosystem.

5.     Considerations and Challenges in CBDC Implementation and AML

Frameworks Implementing Central Bank Digital Currencies (CBDCs) and Anti-Money Laundering (AML) frameworks, including the role of AML solutions for banks, come with various challenges and considerations. Striking a balance between privacy concerns and AML objectives is crucial for safeguarding individuals’ sensitive information while identifying and preventing illegal activities. Achieving effective cross-border AML with CBDCs necessitates global collaboration, regulatory harmonization, and the establishment of platforms for information exchange. Furthermore, the implementation of CBDCs introduces cybersecurity threats and technological vulnerabilities that must be effectively addressed to maintain confidence and preserve the integrity of the system.

1. Balancing Privacy and AML Goals: Implementing Central Bank Digital Currencies (CBDCs) and Anti-Money Laundering (AML) frameworks, alongside the role of AML solutions for banks, poses a set of challenges. Striking the right balance between safeguarding individuals’ sensitive information and meeting AML goals is crucial. This delicate equilibrium requires meticulous consideration to ensure that privacy concerns are addressed while effectively identifying and preventing illegal activities.
2. Global Collaboration and Regulatory Harmonization: The effectiveness of cross-border AML efforts involving CBDCs hinges on global collaboration and regulatory harmonization. To facilitate seamless AML operations, there is a need for international cooperation and the development of platforms for the exchange of crucial information. Regulatory harmonization ensures consistency and clarity in AML standards across jurisdictions, fostering a cohesive approach to combating financial crimes associated with CBDCs on a global scale.
3. Addressing Cybersecurity Threats and Technological Vulnerabilities: The implementation of CBDCs introduces inherent challenges related to cybersecurity threats and technological vulnerabilities. Preserving confidence in the CBDC system’s integrity requires comprehensive strategies to mitigate these risks. This includes adopting robust cybersecurity measures to safeguard against potential threats and ensuring that technological vulnerabilities are addressed proactively. By prioritizing security in CBDC implementation, regulatory bodies, and technological stakeholders can enhance the resilience of the digital currency system against cyber threats and technological vulnerabilities.

6.     Concluding Considerations(CBDCs and the AML Framework)

In light of the increasing prevalence of Central Bank Digital Currencies (CBDCs), a critical aspect demanding thorough scrutiny is the intersection between CBDCs and the AML Framework. CBDCs offer significant advantages in the battle against money laundering, presenting opportunities for enhanced traceability, transparency, and automated transaction monitoring. These digital currencies have the potential to elevate AML capabilities, contributing to the identification and prevention of fraudulent financial activities.

Ensuring the effectiveness of AML activities within the CBDC ecosystem, alongside AML solutions for banks, necessitates the establishment of a robust regulatory framework. Nations, in collaboration with international organizations like the Financial Action Task Force (FATF), are developing AML legislation that encompasses virtual assets, including CBDCs. The overarching goal is to implement compliance mechanisms that mitigate money laundering risks associated with CBDCs, recognizing that national approaches may vary.

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.
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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.