A new report explores the advantages, impacts, and approaches the Eurosystem is considering as it contemplates a digital currency.
By Max von Cube
In October 2020, the European Central Bank (ECB) published a Report on a Digital Euro (the Report). The Report sets out the main findings of a task force initiated in early 2020 to investigate the potential for a central bank digital currency (CBDC) in the euro area.
Reasons to Issue a Digital Euro
The Report identifies a number of scenarios that could cause the ECB to introduce a digital euro, including:
- Supporting the digitalization of the European economy by filling a gap in the provision of digital payment solutions by offering an open-access architecture for retail payment solutions
- Providing a public sector cash-like alternative to payment solutions offered by (potentially unsupervised) private entities or foreign central banks in order to prevent threats to financial sovereignty and stability, and to preserve the possibility of cash-like payments if the use of cash declines significantly
- Reinforcing the transmission of monetary policy (by setting the remuneration rate on the digital euro in order to directly influence consumption and investment choices)
- Providing a resilient payment system as a contingency mechanism should cyber incidents, natural disasters, pandemics, etc., hinder the provision of payment services
- Strengthening the international significance of the euro should other foreign central banks begin issuing CBDCs
Potential Features of the Digital Euro
Key features of digital euros discussed in the Report include the following:
- Riskless money. The digital euro would be a central bank liability, thus providing citizens and businesses riskless money whose value does not fluctuate over time compared to other forms of euros (e.g., cash and wholesale central bank deposits). The Report emphasizes that, despite the fact that a digital euro may rely on the same technology as crypto-assets or stablecoins (distributed ledger technology), it is fundamentally different as the digital euro would be a risk-free liability of the central bank, in contrast to crypto-assets or stablecoins that are either a liability of a private sector entity or not a liability of anyone at all.
- Account-based vs. bearer instrument. The Report considers that the digital euro could be provided either through an account-based system or as a bearer instrument, or both options in parallel. In an account-based system, digital euros would be registered in an account either directly with the Eurosystem or with private intermediaries. Transactions would occur through such accounts as in bank account transfers today, either through private intermediaries as settlement agents, or directly via the Eurosystem’s own infrastructure. A bearer digital euro (“token-based” or “value-based” digital euro), on the other hand, could be exchanged directly between payer and payee without third party intermediation (as cash today) using online or offline payment devices.
- Further features depending on effect of digital euros. The Report considers the effects a digital euro might have, such as on retail payment systems, the central bank, the transmission of monetary policy, international capital flows, financial criminal activities (AML/CTF) and financial stability (such as bank runs into digital euros in crisis situations). To address these effects, the Report discusses further design features such as:
- Access to the digital euro (directly through the central bank vs. indirectly through intermediaries)
- Remuneration rates (at all, fixed, variable, tiered rates) or service fees
- Limitations on transfer volume and individual holdings (potentially also depending on location within vs. outside of the euro-area)
- Recording of payer’s and payee’s identity (possibly depending on transaction value)
Legal Considerations and Next Steps
The Report also addresses the EU law legal basis for the issuance of digital euros (depending on its specific design, e.g., its availability only to central bank counterparties or also to households) and how to assign legal tender status to digital euros.
From a private law perspective, different legal implications arise depending on whether the digital euro is issued as a bearer digital euro or in an account-based model in which the digital euro represents a claim against the ECB/national central banks to which private law rules for bank deposits would apply.
The Report kicks off a public consultation period, and around mid-2021, the ECB intends to decide whether to start a full digital euro project to identify at least one “minimum viable product.”