The digital euro: what would it look like?


The digital euro project initiated by the European Central Bank will enter a new phase at the end of June, the prototype phase.

The source of the digital euro goes back to a report published in 2020 by the European Central Bank and the Eurosystem, which brings together national central banks. A year after this publication, the Board of Directors agreed to launch the first phase of the investigation. A phase that began in October 2021 and will last for two years. “This project is supposed to take into account the new generations’ resentment of criticism and help support innovation,” summarizes Jerome Agdenbaum, vice president of digital security firm IDEMIA. With this in mind, the European Central Bank has chosen to focus its first efforts on developing a digital retail euro for the general public, the idea being to study different use cases. “Nous voyons l’euro numérique comme un billet numérique accessible à tous et qui permet d’offrir un moyen de paiement moderne et sûr, sans pour autant supplanter les monnaies traditionnelles”, précise Claudine Hurman, direct larice Banque des paquement infrastructures innovation from France. The second half of 2022 begins the work of the Eurosystem, which has selected private partners to develop a prototype, with results expected at the end of the year.

Reinventing Payment

Unlike volatile cryptocurrencies such as Bitcoin or Ethereum as well as stablecoins operated by private companies, the digital euro will have to work with existing payment systems. According to Jerome Agdenbaum, “what has prompted central banks to launch crypto projects is above all the fact that private companies are getting into stablecoins.” “The massive adoption of digital payments after Covid and the emergence of the Chinese electronic yuan are also two factors that have contributed to the digital euro project,” adds Regis Wollbaum, Director of Payments at La Banque Postale.

Define use cases

“The ability to pay everywhere will be considered the most important advantage of the new digital payment method,” Fabio Pinetta, a member of the European Central Bank’s Executive Board, said last March. To work on this utilitarian aspect, the European Central Bank relies on the Market Advisory Group, which includes thirty companies in the payment sector. The latter is responsible for advising the European system on both the design and distribution of the digital euro. Among the professionals appointed are five French representatives, namely Cyril Vignet of the BPCE Group, Etienne Gause of the European Payments Council, Nicholas Kozakovic of Worldline, Regis Fulbaum of Postale Bank and Yves Plavier of Société Générale.

Person-to-person payment, in e-commerce, in point of sale, in M2M and even to or from departments such as social benefits or tax… All existing use cases are analyzed for re-engineering. Because although there are many payment methods, they are often national in scope, and do not allow banks to operate independently of non-European payment technologies and service providers. “In its construction, the digital euro should allow the European Union to be completely autonomous on the monetary level,” outlines Regis Vollbaum.

The consultation stage should also enable consideration of not only the needs of consumers but also the needs of the traders. It is with this in mind that the European Central Bank created so-called focus groups last April. These are actually advisory bodies responsible for reporting the preferences and recommendations of potential users. These focus groups will present their recommendations by the end of the year to the European Central Bank.

In addition to this initiative, the European Commission has launched an open consultation with the aim of identifying the first legislation to frame the digital euro. Consultations should end on June 14, and the legal framework should be defined by 2023.

PRIVACY AND SECURITY

“The digital euro will be designed to offer users at least the same degree of privacy as existing digital solutions,” Fabio Panetta said last March. In April 2021, the European Central Bank published the results of a preliminary consultation that revealed that 43% of the European public considered confidentiality a first condition for the adoption of a digital euro. From this observation a question arises. Which technology to choose? Will there be a single payment network? Who is the blockchain? centralized or not? Various avenues are currently being studied by the European Central Bank. “It will be a matter of finding the right balance between vigilance against fraud and terrorist financing on the one hand, and protection of individual data on the other. This will have a lot to do with the choice of technology,” warns Claudine Hormann.

So far, European authorities are fumbling between protection and traceability, but the first tracks are beginning to be heard. “We are moving towards a two-tiered structure where the ECB will have no view of our accounts, unlike commercial banks,” explains Jerome Agdenbaum.

In practice, and in order to promote adoption by the general public, the European Central Bank plans to separate small transactions from large transactions. “It is planned to introduce a tolerance of anonymity for transactions of less than €70,” says Jerome Agdenbaum. A procedure that will maintain the confidentiality of daily purchases, while containing the risk of money laundering. In concrete terms, users of the digital euro must first follow the registration procedure. The solution put forward by the European Central Bank, in particular, plans to introduce wallets, the maximum amount of which is proportional to the degree of customer knowledge.

Invitation to projects

In terms of digital euro distribution, the euro system studies a new model in which the European Central Bank, commercial banks and intermediaries all play a role. “Nothing has been recorded, the ECB has so far been in a call to phase projects that have just led to pre-selection, particularly advisory firms and companies in the payment sector,” Regis Vollbaum told, without elaborating. Objective: To suggest initial customer journeys, new recording technologies, or even avenues for partnerships. “There is everything to be done,” said Banque Postale’s Director of Payments. Testing available technical solutions around a public/private partnership is the new task for the European Central Bank.

In terms of digital euro distribution, we are moving towards a competitive position between banks and fintech companies that will offer different wallets, warns Claudine Hormann. In this configuration, wallets linked to the digital euro must comply with the legal framework. It will be determined by the European Central Bank, in particular with regard to the maximum legislative amount projected for 2023 and the planned publication in 2024.

The five main points to remember:

  • The European Central Bank prioritizes the digital retail currency for the euro
  • The digital euro should make it possible to pay everywhere (online, physical, peer-to-peer, etc.)
  • Tolerance of anonymity is provided for transactions under €70
  • The European Commission has started open consultations until June 14
  • Develop a legal framework in 2023, to be launched in 2024

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