The European Banking Federation (EBF) has lent its voice to the growing clamor for central bank digital currencies (CBDC) in a new report that points out the benefits and risk areas for the digital euro.
The report noted that a retail digital euro designed properly would be integral in improving the strategic autonomy of payments in the European Union. To achieve the lofty ambition, the EBF’s paper warned that the issuers should ensure the presence of “a robust and sustainable business model underpinning it.”
For application, the EBF says that a digital euro should have three levels, with the first being the European Central Bank (ECB) level dealing with the issuance, convertibility, anti-money laundering (AML) requirements, and policy. The second level, termed Industry Level A, will place a premium on interaction in Single Euro Payments Area (SEPA) regions, and Industry Level B will encourage private sector innovation hinged on the principles set out in the other two fundamental levels.
The EBF report notes that significant attention should be given to the design of the digital euro to ensure guarantees for financial stability and bank funding. It pointed out the risks of bank disintermediation stemming from the increased use of CBDCs, which could adversely impact bank deposits and their ability to issue customer loans.
“The level of holdings of the digital euro should be carefully limited by design at a level that prevents financial stability risks,” read the report. “The design of the digital euro should combine a very low cap on holding limit with a limit on the transaction amount that could be higher than the holding limit.”
In terms of design, the EBF favored using a two-tier system, with the ECB being the primary issuer of the CBDC while commercial banks handle the distribution functions. The report urged the ECB to “draw on the knowledge and experience of banks and the private sector” in working on the conditionality of payments with the digital euro.
Other design concerns for the EBF include privacy, cybersecurity resilience, and incorporating an offline functionality to improve the overall offering without compromising security.
Bracing for impact
The ECB’s plan for a digital euro is expected to be finalized sometime in 2026, and ahead of the launch date, industry stakeholders are already preparing themselves for the sweeping changes.
Paris-based European Banking Authority (EBA) has announced its interest in hiring an expert versed in distributed ledger technology ahead of the launch of the digital euro and the widely anticipated Markets in Crypto Assets (MiCA) law.
In mid-March, commercial banks threw their hats in the ring to lead the launch of the digital euro, given their wealth of experience in dealing with consumers, especially in view of bank disintermediation risks.
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