Few endeavours on the EU’s agenda have attracted as much attention as the potential introduction of a retail central bank digital currency (CBDC) for the eurozone, the digital euro. Several years have passed since the European Commission’s initial support for this idea in its Digital Finance and Retail Payment Strategies of September 2020, the report on a digital euro of the European Central Bank (ECB) in October 2020 and the decision of the ECB’s Governing Council to launch the investigation phase of a digital euro project in July 2021 (see our blog post).
On 28 June 2023, the European Commission took a significant next step, by publishing a ‘Single Currency Package’, consisting of a set of legislative proposals setting out a framework for a possible digital euro, whilst also ensuring that individuals and businesses can continue to access and pay with cash. These proposals were published alongside a broader package of legislative initiatives to revise the payment services regime and to introduce open finance.
We’ve taken a closer look at the background and key points of the proposals below.
Drivers and key considerations
There are a wide variety of factors that although individually would not necessarily have led to the creation of a digital euro, taken together make a compelling case for its launch in the eyes of European policymakers. First, the COVID-19 pandemic brought into sharp focus the changing behaviours of European citizens with regard to new digital means of payment, which coupled with the reliance of consumers on foreign payment services providers (PSPs) provided the context for serious consideration of the project. The ECB has also observed the continued drop in the use of cash in the eurozone and has raised the alarm that the emergence of stablecoins and third-country CBDC could pose a threat to the monetary sovereignty of the euro.
As a result, the ECB has pursued an active agenda and work plan leading to the publication of these proposals, including working in close cooperation with the Eurogroup and the European Commission to iron out a number of key questions and design features. These include, for example, financial inclusion, privacy concerns, the potential disintermediation of the banking sector and how to incentivise private persons to offer products and services using the digital euro.
Overview of the proposals
The Single Currency Package comprises two mutually supportive legislative proposals aiming to make sure that both payment options (digital and cash) are available:
- a proposal for a regulation on the establishment of the digital euro (with annexes) – aiming to create the legal framework and lay down essential elements of a potential digital euro, which would allow users to pay digitally with a widely accepted, easily-accessible, cheap, secure and resilient form of the euro, as a complement to euro cash and as an alternative to private digital payment solutions (the Digital Euro Regulation); and
- a proposal for a regulation on the legal tender of euro banknotes and coins – aiming to ensure that cash remains widely accepted and easily-accessible throughout the euro area, in particular with a view to the financial inclusion of vulnerable groups who tend to rely more on cash (e.g., elderly people or persons with disabilities).
In addition, the European Commission published a proposal for a regulation on the provision of digital euro services by PSPs incorporated in Member States whose currency is not the euro (the Accompanying Regulation). Part of its purpose is to ensure that such PSPs will be subject to the same supervisory standards as PSPs in eurozone Member States when providing digital euro payment services.
Key features of the proposals
1. Digital euro
The proposed Digital Euro Regulation establishes the digital euro as the digital form of the single currency, which may be issued by the ECB and, if authorised by the ECB, by eurozone national central banks (NCBs). Like euro banknotes and coins, the digital euro will be a direct liability of the ECB or of NCBs vis-à-vis digital euro users.
Various provisions are intended to embed the digital euro into the existing regulatory framework. In particular, digital euro payment transactions shall be subject to PSD2 (as will be replaced by PSD3 and PSR), the Cross-Border Payments Regulation (as will be amended by the Accompanying Regulation), AMLD5 (as will be replaced by AMLD6 and AMLR) and the Funds Transfer Regulation.
Acceptance – legal tender status
The digital euro will have legal tender status, meaning that acceptance is mandatory, at full-face value, with the power to discharge from a payment obligation – surcharges will be prohibited. To ensure the effective protection of the legal tender status of the digital euro as a single currency throughout the euro area, and the acceptance of payments in digital euro, rules on sanctions for infringements will be introduced and applied in the Member States.
Payees are entitled to refuse payment in digital euro in certain circumstances:
- for small merchants (enterprises with fewer than 10 persons or an annual turnover or balance sheet total of max. EUR 2 million) and non-profit legal entities who also do not accept comparable digital means of payment;
- for individuals acting in the course of a purely personal or household activity,
- where, prior to the payment, the payee has (individually) agreed with the payer on a different means of payment (whereas exclusions of payments in digital euro in pre-formulated standard contracts are non-binding),
- where a refusal is made in good faith and based on legitimate and temporary grounds in line with the principle of proportionality in view of concrete circumstances beyond the control of the payee, or
- where so specified in delegated acts of the European Commission, which shall be based on monetary law considerations.
The digital euro will be convertible at par with euro banknotes and coins, scriptural money and electronic money denominated in euro. Where the acceptance of both the digital euro and euro cash is mandatory, the payer may choose between them.
Banks and other PSPs shall be in charge of distributing the digital euro to natural and legal persons – essentially by providing a range of digital euro payment services (without any additional license being required). These services include enabling users to access and use the digital euro and to initiate and receive digital euro payment transactions, managing their digital euro payment accounts (which work in a similar way as digital wallets and have a unique account number), providing users with digital euro payment instruments, or conducting funding (i.e., acquiring digital euro in exchange for cash or other funds) / defunding operations, among other things.
There is also a catalogue of basic digital euro payment services (BDEPS), which must be provided free of charge to individuals, e.g., opening and holding of digital euro payment accounts, funding/defunding from/into cash, initiating and receiving digital euro payment transactions (person-to-person, person-to-government, government-to-person, or point of interaction including point-of-sale and e-commerce) by means of an electronic payment instrument, or providing such instrument.
Digital euro users may have one or several digital euro payment accounts with the same or different PSPs.
Credit institutions providing certain payment services (enabling cash to be placed on a payment account or cash withdrawals therefrom, operations required for operating a payment account or execution of payment transactions) must, upon request of customers, provide them with all BDEPS.
To foster financial inclusion, Member States shall also designate authorities or post office giro institutions to provide BDEPS to individuals who do not hold a non-digital euro account, persons with disabilities, functional limitations or limited digital skills, and elderly people. Such persons shall also receive face-to-face digital inclusion support in physical proximity (e.g., help with onboarding).
Use – and its limits
Money is commonly understood to function as a unit of account, a store of value, and a means of exchange.
A particular point of interest is that the ECB will be required to develop instruments to limit the use of the digital euro as a store of value, to avoid negative implications for the effective transmission of monetary policy and for financial stability. Especially, the ECB may impose holding limits, which would apply to both offline and online holdings of digital euro. Digital euro holdings in excess of any such limits may be automatically defunded to a non-digital euro payment account when a digital euro payment transaction is received (‘waterfall approach’), and users will also be able to make a digital euro payment transaction where the transaction amount exceeds their digital euro holdings by automatically mobilising funds from a non-digital euro payment account (‘reverse waterfall approach’). We also note that the digital euro will not bear interest – further limiting the use of digital euro as a store of value.
With respect to the digital euro as a means of exchange (payment), limits to charges and fees apply. In particular, merchant service charges or inter-PSP fees must not exceed those for comparable digital means of payment or, if lower, the relevant costs incurred by PSPs for the provision of digital euro payments, including a reasonable profit margin. The only charge per transaction that PSPs may apply to merchants is the merchant service charge. PSPs also shall not charge merchants or other PSPs for the funding/defunding of the digital euro.
The digital euro could be held, and used for payments, both online and offline, i.e., without any internet connection. Digital euro payment transactions must be settled instantaneously (in a few seconds only).
PSPs distributing the digital euro must give users the choice of using either PSP-developed or ECB-developed digital front-end services to access and use digital euro payment services. Moreover, manufacturers of mobile devices and providers of electronic communication services must permit providers of front-end services effective interoperability with the hardware and software features necessary for storing and transferring data to process digital euro transactions on fair, reasonable and non-discriminatory terms. Further, the ECB will seek to ensure to the extent possible that standards governing digital euro payment services are interoperable with relevant standards governing private digital means of payment.
However, the Digital Euro Regulation does not take a stance on whether a digital euro should be issued in a centralised or decentralised manner, such as using distributed ledger technology.
Online payments offer the same level of data privacy as private digital means of payment: PSPs have access to certain personal data needed to perform payments, prevent fraud and combat money laundering and terrorist financing. For offline payments, the level of data privacy is even higher: PSPs only see the same data as in the case of cash withdrawals from an ATM, while no one can view what users are paying for.
2. Euro cash
Acceptance – legal tender status
For euro banknotes and coins, it does not come as a surprise that these qualify as legal tender in the euro area. The second proposed regulation aims to specify in legislation what ‘legal tender’ means (thereby codifying what already follows from case law of the European Court of Justice): broadly, that payees of a pecuniary debt denominated in euro shall accept payments in euro cash, with debt-discharging effect and at full face value (i.e., without surcharges for the payer).
However, according to the proposal, this will not apply to payments for goods or services purchased at a distance, including online (which are generally outside the scope of the proposed regulation). Payees may also refuse acceptance where they have agreed with the payer on a different means of payment in advance, or in good faith based on legitimate and temporary grounds in line with the principle of proportionality in view of concrete circumstances beyond the control of the payee. This includes cases where high denomination banknotes are tendered to settle comparably small amounts, or where enterprises do not have sufficient change available or where the payment would lead to this situation, implying that normal daily business transactions cannot be carried out. The European Commission will be able to adopt further exceptions of a monetary law nature by way of delegated acts.
The proposal sets out that Member States shall ensure sufficient and effective access to cash throughout their territory (including urban and non-urban areas).
Member States shall monitor acceptance of and access to cash, update the European Commission and the ECB in annual reports, and take remedial measures if they consider cash acceptance or access to be insufficient (e.g., geographic access requirements on PSPs providing cash withdrawal services, or recommendations to independent ATM operators or post offices). The European Commission can also step in and require Member States to adopt measures.
The creation and eventual launch of a digital euro is most certainly a political project and one that has of late been facing mounting opposition especially within the European Parliament where there have been concerns raised as to the necessity of the project, its use cases, its added value to citizens compared with commercial money, why holdings should be capped and to what extent, but more fundamentally the impact this project would have on privacy.
It will be very interesting to see how the proposed regulations will further develop in the course of the legislative proceedings and how they will impact the role of the euro, payments and, more generally, financial services markets.
This concerns, in particular, the practical implications for PSPs when it comes to implementing the requirements but also their role in an environment where the digital euro (and related free-of-charge services) will, from a consumer perspective, compete against private digital payment solutions. It is expected that PSPs might use the digital euro as a basis for further innovation, further benefiting consumers.
What seems clear is that consumers will have a larger choice when choosing between payment methods. Whether the digital euro will really be ‘easier to use’ than private digital payment solutions – one of the key benefits promised by the European Commission – remains to be seen and will be a key factor in determining its success.
Unsurprisingly, the ECB welcomed the proposals, and ECB Executive Board member Fabio Panetta, who chairs the High-Level Task Force on a digital euro, highlighted that the package is ‘key to ensuring that the digital euro brings value to the people, taking the appreciated features of cash into the digital sphere’.
As an immediate next step, the European Commission will accept feedback on its proposals until 28 August 2023 (have your say). The proposals will then be debated by the European Parliament and the Council as part of the EU legislative process. From 4 to 6 June 2024, European Parliament elections will take place, which may impact timing. The legislation is not expected to be adopted before June 2024 and the debate in the European Parliament is expected to be particularly contentious. Once adopted, according to the current drafts, the regulations will enter into force on twenty days after publication in the Official Journal, with no transitional period.
Importantly, while the proposals set out the necessary legal framework, the actual rollout of the digital euro itself remains for the ECB to decide. The ECB’s investigation phase concludes in October 2023, following which the ECB’s Governing Council will decide whether to move to the next phase of the digital euro project. A final decision by the Governing Council to issue a digital euro would only be taken after the legislative act is adopted. Overall, it may take a number of years until the vision of a digital euro becomes reality and significant further work will be required.
Our cross-border legal team in Vienna, Frankfurt and London, together with our Brussels-based EU Regulatory & Public Affairs team, will continue to closely monitor the developments. Please do reach out if you would like to discuss any of the topics raised above.