Digital euro
Introduction
The National Bank of Belgium, together with the other national central banks of the Eurosystem, is currently conducting an investigation into the possible issuance of a digital euro. This two-year phase, which was launched in the autumn of 2021, aims to reach a consensus on technical issues and to study the implications the issuance of a digital currency would have for payment infrastructures and financial stability and inclusion.
Simultaneously, the Eurosystem has been engaging in regular dialogue on the subject of a digital euro with market participants,[1] including payment service providers, representatives of consumer organisations and merchants, through the Market Advisory Group and the Euro Retail Payments Board, at European level, and, in Belgium, the National Retail Payments Committee. The work carried out by the Eurosystem, together with the lessons learned from these consultations, has allowed progress to be made in the potential design of a digital euro.
[1] See “Digital euro Project governance and stakeholders”, ECB, 2022.
Decisions taken to date
Amongst the decisions taken so far, those relating to the “transfer mechanism”, i.e. the procedure by which transactions are validated and carried out, are of key importance. In this regard, the Eurosystem has approved the further exploration of an online third-party validated solution and an offline peer-to-peer validated solution. In addition, it was decided that online transactions would be settled at the Eurosystem level and offline transactions at the local storage device level. Transaction, liquidity and user management tasks should be carried out by supervised intermediaries (payment service providers), which will act as the direct point of contact for consumers and businesses.
In the area of privacy, the Eurosystem has decided to further explore (i) selective confidentiality for low-value online payments and (ii) an offline functionality to ensure that user balances and transaction data remain private. Further work is still needed to study how these options could be put into practice, under either the current AML/CFT regulatory framework or a new bespoke regime.
Finally, quantitative limits on holdings and remuneration-based tools have been discussed, so as to prevent the rise of a structural substitution of commercial bank deposits, which could adversely affect monetary policy, financial stability and the flow of credit within the real economy. Moreover, in order to prevent a potential quantitative limit on assets from becoming a transaction limit, the Governing Council has agreed on the possibility to use so-called “waterfall” and “reverse waterfall” functionalities, hence ensuring that end-users have the possibility to receive and make payments in digital euro beyond the quantitative limit, using their linked commercial bank account as a source/recipient of excess funds.
Further steps
The Eurosystem will decide in the autumn of this year whether to proceed to the preparatory phase. Should it decide to do so, this phase is expected to last approximately five years and aims to develop and implement the technical solutions and commercial arrangements needed to make the digital euro a reality. At present, work is already underway at the ECB to identify the appropriate key principles which should guide the Eurosystem in the coming stages of this project.
Indeed, as explained above, the Eurosystem is in the process of carrying out extensive market research, observing and discussing with market participants so as to gather feedback and obtain non-binding information on potential technical solutions, possible costs and related planning considerations. This information will provide insight into the market’s knowledge of and experience with solutions and technologies suitable for the potential implementation of a digital euro. The Eurosystem aims to entrust the development of the various components of the digital euro to the market or the ECB, with the national central banks (NCBs) responsible for in-house development, based on market observations, amongst other factors.
In parallel, the ECB is drafting a digital euro rulebook, so as to establish a set of common rules, standards and procedures to ensure pan-euro area reach and promote a harmonised end-user payment experience, as certain requirements relating to commercial aspects can indeed be specified with the aim of ensuring adequate flexibility to respond to end-user preferences and specificities.
Finally, it should be noted that the design and functionalities of the project will have to be reconciled with the legal framework to be established by the European legislature.