Digital euro to see holding limits, bank distribution, access for non-EU countries, draft shows

A potential future digital euro would be accessible by non-EU countries, would have limits on the amount that can be held and would be distributed by banks and other payment service providers, MLex understands.

According to a draft of the European Commission’s upcoming regulation on the digital euro, seen by MLex, the legal basis for any future issuance would include requirements on distribution, fees, data privacy and money-laundering controls.

The document is a draft and is not final, meaning it can change ahead of its publication on June 28.

The regulation also does not mean a digital euro will ever exist. It sets up the legal framework for the potential future currency, but deciding whether to proceed with issuing lies with the European Central Bank.

The ECB is currently in an "investigation phase" of the project, and will decide in October if it wants to move forward with developing a digital euro.

If it does go ahead, it will start a three-year "realization phase" of developing and testing technology, but the ECB has said a decision on whether or not to issue “may only come later.”

Legal tender

The new regulation will grant the digital euro legal tender status, meaning it must be accepted by payees, with exceptions including for microenterprises and people conducting personal activities.

Payment service providers authorized in the EU can offer digital euro payment services, including basic or additional services, and will not need additional authorization from regulators to provide them.

Users of the digital euro will have a contractual relationship with the provider, not with the ECB or national central banks, and can hold one or more digital-euro payment accounts, either with the same or different providers.

Payment service providers can offer accounts at the request of their clients to any person in a eurozone country. EU payments rules under the Payment Accounts Directive would also apply to digital-euro payment accounts.

Users of the digital euro would not be required to have an existing payment account of traditional euros but could designate a payment account to be linked to the digital euro account if they have one. They could also onboard and make payments through an EU digital identity wallet.

Features

The digital euro would not attract interest, and a limit would be set by the ECB for how much each person could hold. It has not decided on an official limit, but 3,000 euros ($3,300) has been discussed — suggesting the digital euro would mainly be used as a means of payment rather than a store of value.

The commission will have the power to propose secondary legislation on holding and transaction limits, and the ECB is required to report on holding limits no later than six months before the planned issuance of the digital euro, and regularly afterward.

Transactions in the digital euro should be available online and offline, and should not be programmable, so there are no limitations on what the currency can be spent on.

Fees for digital euro payments and services can be charged, but should not lead to excessive charges for merchants and should not be higher than fees for comparable means of payment, the draft states. The ECB should issue recommendations on fees and can decide on a mandatory level in the future, the draft says.

The digital euro would be “to the extent possible” compatible with private digital payment technologies, including shared infrastructures and terminals.

Payment service providers would be able to develop their own front-end services, and users could switch their digital-euro payment account to another provider if they request.

In “exceptional circumstances,” such as if a provider loses the customer’s data, the ECB “may support” switching the digital payment account to another provider.

Access

EU countries outside the eurozone could access the digital euro if they request access and commit to “a number of conditions” and if the ECB has an arrangement with that country's central bank.

Non-EU countries will also be able to access the currency if they have an “international agreement” with the EU and commit to “a number of conditions,” and if the ECB has an arrangement with the national central bank.

The draft also sets rules for cross-currency payments between the digital euro and other currencies, which will need an agreement between the ECB and the national central bank.

Data

Processing of personal data should use “state-of-the-art security and privacy-preserving measures” such as pseudonymization or encryption to ensure data is not directly attributed to an identified digital euro user by the ECB and national central banks. The commission will be able to propose future secondary legislation on personal data processing.

The ECB and central banks won't have access to personal transaction data, and providers will only see the user’s identity and the amount their digital euro account is funded or defunded.

If users are suspected of money laundering or terrorist financing, providers can be requested to submit that data to anti-money laundering authorities.

Uses

Establishing a digital euro is “necessary to supplement cash and adapt the official forms of the currency to technological developments,” as well as offering “a public digital means of payment alongside the existing private digital means of payment,” the draft states.

The current forms of central bank money, banknotes and coins, “alone cannot support the EU’s economy in the digital age,” it said.

The shift in popularity away from cash and towards digital payments “puts as stake the desirable balance between central bank money and private digital means of payment,” it says.

This problem could be “reinforced” in the future with the emergence of non-EU digital currencies issued by central banks, and stablecoins issued by private firms, which could “challenge the role of the euro in payments, in the EU and outside,” the draft says.

The lack of a widely available and usable form of central bank money adapted to the digital age “could also diminish trust towards central bank money, and ultimately towards the euro itself,” the draft says, warning that this could “undermine the monetary anchor role of central bank money, weakening financial stability and monetary sovereignty in the EU.”

The commission will have a lot of convincing to do to offset widespread skepticism about the usefulness of a digital euro for retail consumers, as opposed to one used wholesale by banks.

Industry, lawmakers and NGOs have questioned the benefits a digital euro would provide compared to cash, and if its use cases are worth the resources needed for the ECB to develop the coin.

While the decision on whether or not to issue a digital euro lies with the ECB, other bodies will continue to weigh in.

Once the draft regulation is published, EU governments and European Parliament lawmakers will need to approve it for it to move ahead, while eurozone finance ministers will also debate the political dimensions of the currency.