Herwig Temmerman and Dimitri Cordenier (BearingPoint) : The digital Euro, where do we stand ?
On October 18th, the European Central Bank (ECB) took a significant step forward by entering the “preparation phase" of the digital euro project. This phase aims to establish the groundwork for the digital euro. The final decision to issue a digital euro will only be considered after completion of the European Union’s legislative process.
Why do we need a digital Euro?
In general, both the European Commission and the ECB are aligned on the necessity of a digital Euro. In light of current market and technological developments, these institutions are recognizing that it may no longer be able to hold risk-free central bank money if the usage of cash continues to decline and electronic payments and privately issued digital currencies continue to gain prominence. These market shifts also pose potential risks to the EU's independence and stability. Other compelling reasons for the adoption of the digital Euro include cost reduction, reduced cyber risks, decreased ecological impact, enhancing financial inclusion, and facilitating the execution of monetary policy. Moreover, a digital Euro could bolster the Euro's credibility and international influence.
“A 2 years’ preparation phase of the Digital euro will start in November, but the final decision to issue a digital euro, will only be considered after the EU has completed the legislative process.”
What will the Digital Euro look like?
Only the ECB will be able to authorize the issuance of the digital euro. However, both the ECB and the national central banks will be able to subsequently issue the money. The digital Euro will only be accessible for retail clients and digital Euro and Euro banknotes and coins will be convertible at face value. Online and offline payments will be possible. All payments will happen in real time. Digital Euro users will not have any contractual relationship with the European Central Bank or the national central banks. It will be the Payment Service Providers (PSP’s) who will be holding the digital Euro accounts for the retail users. Finally, the accounts will be non-interest bearing as the digital Euro is designed for transaction purposes only and should not be used as a store of value.
Will the digital Euro require PSP’s to make complex and costly developments?
Yes, PSP’s will have to develop new functionality to support the digital Euro. For instance, PSPs will have to create mechanisms for automatically defunding digital euro transactions which exceed a specified limit to non-digital euro payment accounts upon receipt of funds. They will also need to enable online digital euro payments when transaction amounts exceed the available digital euro balance. PSP’s will thus have to link each digital euro payment account to a non-digital euro payment account designated by the users and potentially with a different PSP.
There will be no fees for basic payment services for natural persons, but PSPs should be able to charge merchants for using digital euro acquiring services and inter-PSP fees to cover their distribution costs at an average cost as estimated by the ECB plus a “reasonable margin of profit”.