Central Bank Digital Currency

ECB issues first digital euro ‘preparation phase’ progress report

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The European Central Bank (ECB) has published the first report on its digital euro preparation phase, including updates on offline functionality, holding limits and the tender process for digital euro component providers. Privacy was also highlighted, following on from a June 13 blog published by the ECB on how to make the digital euro “truly private.”

The digital euro “preparation phase” was launched on November 1, 2023 with the aim of laying the foundations for the potential issuance of a digital euro.

This week’s report outlined the progress made on key digital euro design aspects, the envisaged next steps for the project and measures taken to assuage concerns around a European Union-wide central bank digital currency (CBDC).

Calming privacy fears

Privacy is a favored rallying cry of anti-CBDC advocates, particularly in the U.S., where the possibilities provided by applying blockchain’s immutable ledger to a national currency are too often conflated with the eroding of civil liberties and surveillance state. As such, it has been of primary concern to authorities around the globe exploring the technology. The digital euro is no exception.

“The privacy and data protection of digital euro users have been fundamental to the project from the beginning, in line with the ‘privacy by design’ approach,” said the ECB. “The public consider privacy and data protection to be two of the most important design elements of a digital euro, which is why the Eurosystem [the monetary authority of the euro area] has prioritised these aspects at every stage of the project.”

In terms of updates, the report noted that the design of the digital euro would include an offline functionality that would offer users a “cash-like level of privacy” for payments in physical shops and between individuals. When paying offline, personal transaction details would only be known to the payer and the payee and would not be shared with payment service providers, the Eurosystem, or providers of supporting services.

The ECB added it had agreed on the technical features required “to guarantee that online digital euro transactions will provide an even higher privacy standards than current digital payment solutions, while still ensuring robust end-user protection against fraud.”

These features would include pseudonymization, hashing, and data encryption to ensure it would not be able to directly link digital euro transactions to specific users.

This is in addition to current practice, which permits payment service providers access to only the personal data required to ensure compliance with EU law, such as anti-money laundering regulations. To use data for commercial purposes, payment service providers do—and will continue to—need users’ explicit consent.

After outlining its progress in the privacy sphere, the report went into more depth on offline functionality.

Offline digital euro

“A digital euro would be available for both online and offline use and could be used for person-to-person payments as well as in physical shops,” said the ECB. “The offline functionality would enable payments to be made without an internet connection, for example, at close range, in locations with limited network coverage, and in the event of power cuts.”

The offline functionality being developed by the ECB would enable payments to take place directly between offline devices, such as mobile phones or payment cards, belonging to the users involved in the transaction, without relying on third parties.

In this regard, the ECB clarified that it had “intensified its efforts” to investigate offline functionality in users’ devices but that any reliance on the physical specifications of mobile devices to access and use the digital euro offline would depend on the outcome of the legislative discussion.

Meanwhile, the ECB also said it had been investigating alternative delivery forms for an offline digital euro, such as battery-powered smart cards and non-powered smart cards that use a “bridge device” to connect.

Tenders for digital euro work

In January, the ECB published a vendor call for €1.1 billion ($1.17 billion) worth of contracts to establish framework agreements with potential providers of digital euro components and related services.

Specifically, The call was for five applications: online testing and proctoring, publication production works, provision of consultancy for treasury management systems, leadership development services, and medical advisory and review services.

As part of this week’s update, the ECB announced it would be proceeding with the selection process by inviting the highest ranked respondents to tender.

“This process will help decide the final technical details for designing a digital euro,” said the report. “It will be fundamental to establishing framework agreements with the most suitable providers and preparing to develop a digital euro.”

However, the ECB was also keen to emphasize that this process is not a commitment to initiate development but “simply a preparatory step” to ensure readiness should the bloc decide to proceed with a CBDC.

Holding limits

Another aspect of the digital euro elaborated on in the report was holding limits, i.e., the maximum amount of CBDC an individual or entity can own at any given time.

Previously, in 2023, the Eurosystem explored the impact of a hypothetical CBDC on financial stability and concluded that “the simulations…show that the impact would have been relatively benign, provided a digital euro holding limit of €3,000 per person would be in place.”

This led many to assume that a €3,000 ($3,216) holding limit would be a feature of any proposed digital euro.

However, in Monday’s progress report, the ECB said the final limits “would be set closer to its possible launch date (to ensure it reflects the economic conditions at that time).”

In addition, the ECB commented that “calibration” is already underway to determine these final holding limits and that it would be based on a balance between an optimal user experience and the need to maintain price and financial stability.

“These holding limits are intended not to prevent the digital euro from being a store of value altogether but rather to moderate its use in this capacity, and thus preserve the role of banks in ensuring the efficient provision of credit to the real economy,” assured the ECB.

ECB’s digital euro journey

The ECB and the European Commission (EC), the EU’s legislative arm, have been exploring the idea of a digital euro for several years. Focused efforts began in 2020 when the ECB produced its first comprehensive report on a digital euro, outlining the potential frameworks and reasons for exploring a digital version of the euro.

A consultation phase followed, from October 2020 – January 2021, during which the ECB collected views on potential benefits and challenges of a digital euro from a range of stakeholders, including the public and financial institutions.

After the consultation, the ECB decided to move forward with a formal “investigation phase” to explore the feasibility and design of a digital euro; this phase ran for two years, from October 2021 to October 2023.

In July 2023, the EC published a draft bill detailing its legislative plans to make the digital euro legal tender and available across the eurozone, while still preserving cash payments. The ECB welcomed the proposals and pledged to work with the EC and other EU institutions on the project. At the time, ECB President Christine Lagarde said the banking body would decide whether to move forward with the digital euro project in October.

In the end, after the conclusion of its investigation phase, the ECB decided to proceed with preparations for an EU-wide CBDC. In November 2023, it began its mandatory “preparation testing phase” for the digital euro to explore the technicalities and operational procedures.

A couple of months later, in January of this year, the ECB’s Rulebook Development Group (RDG) published an update report on the draft rulebook that would eventually set the standards and procedures for the digital euro, should it become a reality. The report provided insight into the technical aspects of the EU’s CBDC design, and the RDG encouraged feedback on the draft to help shape the process going forward.

Monday’s report represented the first comprehensive update on the planning, designing, and decision-making progress of the digital euro preparation phase thus far, taking the bloc one step closer to an EU-wide CBDC becoming a reality. But it remains far from certain, and there will likely be many more updates on the long road to a digital euro.

Watch: Finding ways to use CBDC outside of digital currencies

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