On October 18, 2023, the Governing Council of the ECB authorized the ECB to continue to the “preparation and experimentation phase of the digital euro.” This phase, which could take around three years, will lay the foundations for a potential digital euro.
Over the coming months, the EU Parliament will be working to finalize the legislation that will set the rules and guardrails for an ECB-issued digital Euro, an EU CBDC, though the schedule for the vote on the legislation is not set yet.
In conjunction with the authorization on October 18, the ECB issued a report entitled “A stocktake on the digital euro- Summary report on the investigation phase and outlook on the next phase“[i]. Link Here: https://www.ecb.europa.eu/paym/digital_euro/investigation/profuse/shared/files/dedocs/ecb.dedocs231018.en.pdf
The report portrays a Euro CBDC as necessary and harmless, but i) there is no mention of shortcomings of current payments systems that can be remedied by a CBDC to establish its necessity and ii) nor does it mention that the programmable nature of a digital Euro alterable and therefore potentially harmful to individuals and to society at large.
The strategic impetus of this project is summed up in one sentence in the introduction of the report:
“A digital euro would safeguard the strategic autonomy of the European payments system and increase its resilience while supporting competition and innovation to the benefit of consumers and merchants alike. It would offer a payment solution under European governance.” (My emphasis)
The key points in the report:
1) The general approach is that an EU CBDC “is needed”
a. A CBDC incorporates technology into a fiat system to bring value to “to each stakeholder group, e.g. individuals, merchants, payment service providers (PSPs) and public authorities.”
b. A CBDC would “safeguard the strategic autonomy of the European payments system and increase its resilience while supporting competition and innovation to the benefit of consumers and merchants alike.”
c. The benefits would be to “boost the efficiency of the payments system, drive down costs and foster innovation.”
2) Attributes for users that together are claimed to be “unique” to a CBDC
• free for basic use;
• usable for any digital payment in the euro area;
• widely accepted and easy to use; not requiring an online connection (it could also be used offline);
• offering the highest possible protection of privacy;
• inclusive, leaving no one behind;
• settling payments instantly;
• secure;
• risk-free (as money issued by the central bank);
3) Implementation
a. Integration into the current system leveraging PSPs (Payment Service Providers)
b. Support services provided by the ECB
c. Responsibilities of the PSPs
d. Fair compensation for PSPs
e. Limiting CBDC use to protect the banking system
f. Requiring elements to ensure financial inclusion
4) Protecting privacy
a. As a fundamental right
b. How “privacy models could shape and be balanced by public policy objectives”
c. Minimize the user data processing
d. Protect against the EU being able to “identify any individuals making or receiving digital euro payments.”
e. Extensive stakeholder engagement helped “to show that it would be possible, from a product design and distribution perspective, to develop a digital euro that meets the needs of users and the requirements of the Eurosystem.”
Because much of the payments infrastructure in Europe today is from foreign incumbents like Visa, Mastercard, American Express, etc, and much of the new technology will come from other rising fintechs like Block and Paypal, and/or blockchain-based solutions like Bitcoin, Ethereum, etc, the EU sees lost autonomy as more important than improved efficiency. Much like the EU’s concerns over time with tech giants Microsoft, Google, Amazon, Facebook and many others, the EU sees its past strategy of imposing fines on encroachments against its sovereignty as inferior to its ability create a state-controlled competitor. The EU is arguing that it is a more trustworthy guardian of privacy rights than the private sector or a potential decentralized solution in the future; noteworthy, given the KYC/AML protections that are imposed anyway.
There seem to be three major issues that opponents of CBDCs focus on in the US:
1) CBDCs are software-based currencies that are necessarily controlled by a centralized issuer, and therefore can necessarily be adjusted and/or altered; therefore protections against privacy and/or ability to control spend-ability can always be changed either by legal edict or by bad actors.[i]
2) CBDCs as a direct liability of the central bank displace bank reserves and undermine the fractional reserve banking system. Section 4 of the report describes the need to limit CBDC per person. One reason cited is in times of stress, depositors should not be able to withdraw their cash to purchase CBDCs as risk-free alternative to being subject to their bank’s creditworthiness.
3) Leveraging the PSPs for distribution raises the necessity of government control over their profitability. The intention of the EU is to provide “fair” compensation to the PSPs for the value they are providing in distribution. This amount of compensation is sure to be subject to political considerations and threaten private sector competitiveness.[ii]
The establishment of a digital Euro, and ECB-issued CBDC, could be viewed as a watershed event by other countries, including the US, for issuing their own CBDCs.
Currently, a CBDC faces significant opposition in the US, but proponents are likely to stiffen their resolve if the EU approves a CBDC.
In Part 2, I will explore the arguments for and against CBDCs in more detail. Please check out my interview with Nick Anthony of the Cato Institute for a discussion of the current outlook for CBDCs globally recorded on March 13, 2024 HERE.
Footnotes below.
[i] See the position paper written by Epicenter.works HERE, a Human Rights non-profit organization in Austria for more details on the current CBDC legislation.
[ii] For much more detail about how a CBDC under current considerations might impact PSPs, see HERE for a position paper published by the EPIF.