How a Digital Euro could revolutionize Europe’s payments ecosystem

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The European Central Bank (ECB) has decided to pursue ambitious plans to establish a Digital Euro, at a time in which global jurisdictions seek to make the most of the rapid digitalization of payments.

On July 14, the ECB announced that as of October, it will move into the two-year ‘investigation phase’ of its Digital Euro project, predominantly focusing on the design of the currency and the ways in which it could be distributed to merchants and citizens. 

The ECB believes a Eurozone Central Bank Digital Currency (CBDC) could offset the risks of crypto-assets being led by Big Tech firms who are already in possession of huge amounts of consumer data, as well as mitigate the susceptibility of traditional cryptocurrencies, such as Bitcoin, to market volatilities.

In this context, a January survey from the Bank of International Settlements found that 8% of global central banks are in some way “actively researching the potential” for digital currencies. 

In the United States, Federal Reserve Chair Jerome Powell said in mid-July that the best way of combatting the power of privately run cryptocurrencies is for central banks to establish their own digital assets. The Federal Reserve will release a report in September which will analyse the potential benefits of establish a centrally-managed digital currency.

China is regarded as one of the more advanced nations with regards to developing its own digital currency. It is currently trialling its digital yuan, including innovative features such as the ability to transfer payments between smartphone simply by touching handsets together. 

In the UK, the Bank of England and the treasury have teamed up to form a task force that will probe the viability of a future digital currency issued by the central bank, while Sweden’s central bank has announced plans for piloting an e-krona, working with lender Handelsbanken. 

In the private sector, the ECB has long feared the threat to European monetary sovereignty posed by the introduction of crypto assets by Big Tech. Plans for Facebook to introduce its own digital currency, Diem, formerly known as Libra, were temporarily shelved following resistance in the EU. 

In Brussels, there lacks a harmonized regulatory framework for crypto-assets, but the EU wants to correct this with the eventual adoption of new rules for markets in crypto assets (MiCA), which will lay down new rules for the issuance of crypto-assets in the EU, including Facebook’s Diem.   

Design phase: Interoperability opportunities 

The investigation stage to be launched by the ECB later this year will involve probing some of the key design features of the digital euro project. Broadly speaking, the central bank wants the currency to be easily accessible, safe to use and in full compliance of necessary privacy legislation.  

Moreover, interoperability both with third-party private intermediaries and with other global currencies has been pitched as an important design element, potentially creating opportunities for Europe’s FinTech players and non-bank providers to assist in the development of applications that will bring the digital euro to the smartphones of European citizens. 

“Our objective would be to make a digital euro interoperable with private payment solutions, so that it could be accessed through them,” Fabio Panetta, member of the ECB leading the Digital Euro plans, said recently. 

“It would thus level the playing field by making it possible for all market participants – bank and non-bank intermediaries and fintechs – to offer, at a lower cost, products that allow people to pay instantly,” he posited.

In this context, the ECB has cited the importance of ‘standardized front-end solutions’ to be a core feature of making the Digital Euro accessible to citizens, as well as implementing certain features into the software, with regards to identification protocols, when making a payment. 

Interoperability with international digital currencies has also been underlined, with the ECB stating that such “could create much needed efficiency gains in cross-border payments.” 

The data race for digital currencies

Moreover, in terms of involvement for intermediaries in the EU’s future digital euro project, it is the access to consumer data that provides opportunities for market entrants, not however without associated risks. 

A recent report on the digital euro from BofA Securities, Bank of America’s brokerage arm, notes that there is a gap in the market for smaller firms to emerge in this space.

“It is reasonable to imagine a non-bank name finding a way of using the data available in salaries and payments to offer, for example, merchants a payments loop that costs less than the 0.6% of the current system,” the March report states.

“Some ‘killer app’ that consumers find more convenient, cheaper, or with better points and discounts could see rapid adoption.”

This space, the analysis states, emerges from its reading that the ECB is proposing the digital euro as a “big tech neutralizer” that will attempt to nullify the market instabilities that may arise from some of the world’s largest platforms having access to consumer financial data. 

Earlier this year, Pannetta said that “data-driven models could jeopardise privacy and pose the risk of personal information being misused” and that the potential integration between services offered by Big Tech firms and digital currencies could exacerbate existing market instabilities. 

It’s not only in the social media space, with Facebook’s Diem, that such a challenge exists. This week, speculation arose as to Amazon’s interest in the payments arena, after the company advertised a vacancy for a ‘digital currency and blockchain product lead.’

And while the ECB has concerns over the merging of payments data with data already held by dominant platforms, there has been no shortage of stakeholders that believe the preservation of privacy to be the most important issue in Europe’s future rollout of a digital euro. 

Earlier this year, the European Central Bank concluded a public consultation in which ‘privacy of payments’ emerged as the central issue among stakeholders, followed by ‘security’ and ‘pan-European reach.’  

As a means to meet high privacy standards, the ECB may consider allowing very small transactions to be conducted anonymously, offline. The option of issuing ‘anonymity vouchers’ has also been previously suggested by the ECB’s Panetta. 

There are broader risks that will be considered as part of the investigation stage to commence in October. Such includes the possibility of a rush on the digital euro, whereby Europeans may seek to transfer their assets from traditional banks into the new currency, depriving banks of millions in cash deposits. This is something the ECB would look to mitigate with a potential €3,000 limit on holdings. 

The process for drawing up detailed plans for a digital euro may take some time. The ECB has charted two years to finalize the design of the currency, and then the central bank’s Governing Council will need to ratify the plans, which could take a further three years. 

However, the ECB is clearly keen on making progress at a time in which global jurisdictions seek to capitalize on the rapid increase in digitalization of the payments sector. Alongside the reticence of the ECB to allow such a transformation to be led by Big Tech, there remains a golden opportunity for some of Europe’s emergent players to enter this ecosystem, and take full advantage of the long-promised, yet largely unrealized, benefits of digital currencies.

Featured image credit: Immo Wegmann / Unsplash

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