Which primary characteristics must a digital euro possess to guarantee being a serious alternative to physical money in the future? The answer to this question is provided by systematically reviewing three different levels of analysis. First, the various design dimensions of a digital euro; second, how a digital euro would fit into the European payments landscape; and third, the legal requirements for implementing a digital euro. The analysis concludes with well-considered recommendations on all three levels of analysis, particularly aimed at central banks involved in developing a central bank digital currency.
This paper comes at a crucial time for decision-making on the future shape of the international monetary system and the path of the digital euro project. The working group has met over the past few months to contribute, through the interdisciplinary and professional expertise of its members, to the many facets being debated regarding the development of the digital euro.
Much water has flowed under the bridge since January 2017, when the European Parliament Committee on Economic and Monetary Affairs (ECON) report “FinTech: the influence of technology on the future of the financial sector” recommended that the European Central Bank (ECB) conduct experiments on the digital euro, a central bank digital currency (CBDC) issued by the ECB. The stalled Libra-Diem project and the declining use of cash as a means of payment cleared the field of indecision and spurred the ECB to announce the start of an investigation phase for a digital euro. A recent Bank for International Settlements (BIS) survey on CBDCs (BIS, 2021) reports that most central banks (around 90%) are involved in CBDC initiatives. Many are at an advanced stage of exploring CBDC adoption: almost one-fifth of central banks are developing or testing a retail CBDC, twice as many as those focused on a wholesale CBDC.
The questions posed to the members of the working groups started from the three aspects considered most relevant for determining the characteristics a digital euro should possess. Firstly, the analysis of the technical and organizational designs of the digital euro. Second, the interoperability of a digital euro with the payments system and its relevant implications. And thirdly, determining the need to reform the current legislative and regulatory framework concerning the euro. These points – design models, payment relevant aspects, and regulatory framework – are, in fact, closely linked. Slightly more than two-thirds of central banks are considering a public-private model (or, more specifically, a 'two-tiered model'), where the private sector fulfills the functions of know your customer (KYC), anti-money laundering (AML) and combating the financing of terrorism (CFT) compliance, retail payment processing, and transaction recording.
The ECB has, on multiple occasions, noted that there is a need to amend the regulatory framework to include the digital euro alongside the physical euro as legal tender (ECB, 2020). This need for amendment is not unique to the digital euro. In other jurisdictions too, change is required to allow monetary authorities to issue digital money. More than a third of the central banks considering issuing digital money will have the power to do so within 2022 (BIS, 2021). Only a quarter are not yet in a position to do so, and the rest are uncertain whether legislative intervention is necessary. The issue is quite delicate. In the case of the euro, the literature that has dealt with it has grasped discordant aspects, starting from divergent hypotheses. This is not surprising. The question of a digital currency is not only legal, but also technical. As is seen from the following recommendations of the DEA working group, there are various possibilities of integrating with the ongoing and emerging legislative framework. However, the most delicate knots that need to be unraveled are those which can guarantee the homomorphism of CBDC with paper money. The Commission and the ECB face what is probably the most significant challenge facing the eurozone since its inception. This document concludes with an analysis and set of recommendations that the DEA Public Digital Euro Working Group presents for the utility of policymakers and the monetary authority in the 'constituent spirit' that this process inevitably requires, contributing to the preservation of public money in an increasingly digital economy.