Digital Euro 2023

Time order

Formalized work on the Digital Euro began in 2021 under the aegis of the European Central Bank and Eurozone central banks. Consultations with market representatives are being carried out under the Euro Retail Payments Board (ERPB). A final decision on moving to Euro implementation is expected in the third quarter of 2023.

This entry is current as of 2023.02.06.

Organizations and sources

Work on the Digital Euro is underway at the European Central Bank (go to the ECB’s Digital Euro project pages).

Structure

The structure of the Digital Euro is being worked on extensively and may be subject to far-reaching changes. The key assumptions known as of the date of this entry are summarized in the study below.

It should be noted that the currently contemplated design of the Digital Euro brings it closer to a payment method than to a unit of currency. In fact, it is a project to introduce a universally accepted payment method under the control of the European Union.

In this view, the Digital Euro project realizes the Union’s primary strategic objective, namely the Union’s strategic autonomy in the area of payments. It is primarily about independence from non-European payment mechanisms, which for today offer standardization and universality of acceptance unavailable to the methods of Union countries).

In subsequent stages, the Digital Euro may be shaped as a viable unit of currency.

Financial structure

The Digital Euro will be a liability of the central bank. The financial situation of the holder of the Digital Euro is to correspond to that of the holder of a Euro banknote. Any settlement errors will be charged to the central bank.

Functional structure

The following features and functions of the Digital Euro are envisioned:

• payment types: payments at physical points of sale and online payments
• object of payment:
  • payments to merchants, i.e., where the goal is to pay for the provider of goods and services through clearing agents
  • person-to-person (P2P – person to person) payments, regardless of the object and title of payment
• payment mechanism:
  • with internet connectivity
  • without internet connectivity (subways, premises on underground floors, areas without cell phone coverage, etc.).
• technology: blockchain is one of the technologies that can be used to implement the Digital Euro

based on the course of work so far, it is expected that traditional technology, not blockchain, will be used for this purpose

• interface:
  • application issued by providers participating in the Digital Euro (banks, payment service providers)
  • the work in progress is also considering the provision of a basic Digital Euro application by the European Central Bank, which could be used by providers without the resources to develop their own application
• programmable money:
  • The Digital Euro is intended to be money, not a public voucher, and therefore will not have the ability to be “programmed” by public authorities (for example, as to the expiration date, as is being considered for the digital Yen)
  • however, it is not excluded that the Digital Euro will have the possibility of “programming” by the user; for example, the holder will be able to program a payment with a future date, or following the fulfillment of a certain condition – this payment will be “certain”, i.e. the Digital Euro in such a form would provide an escrow-type service (such a function today is practically impossible to obtain using traditional payment services due to the absolute revocability of a consumer push payment order with a future date, cf. Article 80 of PSD2, Article 51 of the Payment Services Act).
• access:
  • in order to use the Digital Euro, the user will have to use the service of a provider operating the Digital Euro
  • in order to purchase the original Digital Euro, it will be necessary to have book money in a payment account maintained by that provider, similarly for the conversion of the Digital Euro into traditional money
  • the alternative is to acquire and sell Digital Euros for cash, if the user’s provider supports cash
• limits:
  • the balance of the Digital Euro will be significantly limited to prevent the use of the Digital Euro in the thesis function
  • in the works were proposals for limits on amounts of EUR 3,000
    in order to avoid situations in which the Digital Euro cannot be used due to exceeding the limits, a waterfall mechanism is envisaged
  • in the waterfall mechanism, if the limit is exceeded, there will be an automatic transfer of excess funds to the associated account, or if the balance is insufficient
  • it will be possible to purchase the missing amount of Digital Euros from the book money balance
  • it is expected that all these functions will be subject to detailed configuration by the user
• off-line payments: a separate balance for off-line transactions is envisaged, which will be synchronized at the next network access

The role of the public and private sectors

The Digital Euro will be operated by public sector entities (the central bank) and private sector user-providers (mainly banks and payment service providers).

In the case of the central bank, we are referring to banks belonging to the Eurosystem.

The private sector participating in the Digital Euro has not been uniformly defined in the work to date. We are currently talking about credit institutions and payment service providers.

It is currently undecided what specific payment or other service would constitute the enabling of the Digital Euro. During the work, the concepts of service in the mode known from Open Banking, i.e. in the role of third-party providers, were floated.

Central bank

In the circulation of the Digital Euro, the central bank performs tasks:

• admitting the user provider of a specific credit institution (in Polish realities a bank, SKOK) and payment service providers to operate the Digital Euro (onboarding). The central bank will not have a civil law contract with the user of the Digital Euro, such a contract will be concluded by the user provider servicing the Digital Euro.
• settlement of Digital Euro transactions on behalf of credit institutions and payment service providers

User supplier

In the circulation of the Digital Euro, the user’s supplier performs tasks:

• establishing a contractual relationship with the user (contract for a Digital Euro account or wallet)
• performing AML duties, both at the stage of establishing the relationship and performing operations
• performing activities other than settlement, i.e. handling instructions (authentication, verification, etc.) and post-settlement activities (complaints, etc.)
• maintaining the so-called golden copy of the Digital Euro balance that the user has in the central bank (permanent access to the balance)
• providing interfaces to users (devices such as POS terminals for merchants, applications for users)
• handling of Digital Euro replenishments/deletions, including the waterfall mechanism

Privacy

The central bank will not have access to user information, including the balance and patterns of using the app or paying with the Digital Euro.

Digital Euro Payment System

To ensure the proper functioning of the Digital Euro, a separate payment system will be established. The task of the system will be to define the rules of operation for the issuance and acceptance of the Digital Euro, as well as clearing and settlement between suppliers. The rules of the system will be determined by a working group established at the European Central Bank consisting of market representatives.

Open issues

Despite the comprehensiveness of the issues raised in the work on the Digital Euro to date, a number of questions remain open that will have an overwhelming impact on the adoption of the Digital Euro and the scale of its benefits.

Key issues to be determined:

• how wide will be the circle of institutions that will be able to act as user providers
• what will be the role of non-bank payment service providers, in particular:
  • whether they will be able to handle Digital Euro trading like credit institutions (this will require an amendment to the Settlement Finality Directive)
  • whether they will handle this turnover in a different scope or role, for example, analogous to today’s PSD2 third – party – providers
• whether the user will be able to use the services of multiple providers at the same time (this issue affects limits, operation of the waterfall mechanism), whether it will be possible to aggregate balances and transfer between providers
• whether AML obligations will be limited only to Digital Euro balance replenishment / desilting operations
• whether Digital Euro accounts and wallets will be available in open banking
  what will be the settlement rules and fees under the Digital Euro payment system

What we deliver

In the Digital Euro project, DLK Legal supports suppliers in, among other things:

• assessing the impact on current operations and future services
• planning the implementation of services based on Digital Euro
• representation in the legislative process

See also

• summary of Digital Banking Academy: payments 4.X, 31.01.2023 with DLK Legal’s speech “Construction of Digital Euro and payment scheme dedicated to Digital Euro”.
• summary of 12.FinTech & 11.InsurTech Digital Congress, 27.09.2022, Warsaw with DLK Legal’s speech “Digital Currencies of Central Banks: digital zloty – will it become a means of payment?”

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