June 24, 2024
- ECB designs high privacy standards to make online and offline digital payments as close as possible to cash transactions
- The ECB has started designing a methodology for calibrating digital euro holding limits
- The ECB continues to provide technical input to legislative discussions with European co-legislators
The European Central Bank (ECB) today published its first progress report on the preparation phase of the digital euro, which started on November 1, 2023, with the aim of laying the foundation for the possible issuance of a digital euro.
The report outlines the progress made on key design aspects of the Digital Euro and the envisaged next steps for the project.
Digital euro privacy
The design of the digital euro includes an offline functionality that would provide users with a level of privacy comparable to cash for payments in physical stores and between individuals. With offline payments, personal transaction data would only be known to the payer and the payee and would not be shared with payment service providers, the Eurosystem or any ancillary service providers.
In recent months, the ECB has agreed on the technical features needed to ensure that online digital Euro transactions will offer even higher privacy standards than current digital payment solutions, while still providing end users with robust protection against fraud. The Eurosystem would use advanced measures, including pseudonymisation, hashing and data encryption, to ensure that it cannot directly link digital euro transactions to specific users.
In line with current practice, payment service providers would only have access to the personal data necessary to ensure compliance with EU law, such as anti-money laundering regulations. To use data for commercial purposes, payment service providers require the express consent of users. As issuer and payment infrastructure provider for a digital euro, the ECB will be supervised by independent data protection authorities who will monitor compliance with the European Data Protection Regulation (EUDPR) and the General Data Protection Regulation (GDPR).
An offline digital euro
The Eurosystem is developing an offline functionality that allows digital euro users without an internet connection to pay, after pre-financing their digital euro account via the internet or an ATM. Payments would take place directly between the offline devices – for example mobile phones or payment cards – of the users involved in the transaction, without relying on third parties.
The ECB has investigated the technical tools already available on the market that could enable the settlement of offline digital euro transactions directly on end-user devices. It also assessed other essential aspects of offline digital euro payments, with the aim of making them seamless, secure and user-friendly.
The ECB’s technical work has focused in particular on supply considerations and how offline digital Euro wallets can be funded and unblocked, including how money laundering and counterfeiting controls can be implemented. For offline payments, users could use their mobile devices, while the Eurosystem is also exploring the possible use of battery-powered smart cards or non-powered smart cards using a bridge device[1] to communicate.
The effective implementation of an offline digital euro on mobile devices will ultimately depend on the requirements set out in the digital euro regulation for equipment manufacturers and providers of electronic communications services.[2]
Limits for holding digital euros
The design of a digital euro should ensure that it can be widely used as a means of payment, while maintaining financial stability and the transmission of monetary policy. For this reason, individuals’ holdings of digital euros would not be compensated and there would be limits on their holdings.[3] In addition, users would have the option to link their digital Euro wallet to a commercial bank account, allowing them to make payments through their digital Euro wallet without having to pre-fill it with money.
The ECB has started work on a calibration methodology to define asset holding limits, which will entail a comprehensive monetary and economic assessment.[4] A newly created workflow, including experts from the Eurosystem national central banks and national competent authorities, has started to identify the factors that could influence the calibration of holding limits. In this context, the ECB has initiated a dialogue and data collection to obtain the detailed data needed to carry out the assessment. As this is a collective undertaking, the ECB regularly consults with co-legislators and market participants (consumers, traders and financial institutions) to keep them informed of the technical work and to gather feedback. The first engagements have already taken place, and more will follow in the coming months, given the relevance of this work for all stakeholders involved in the digital euro project.
The findings from this initial assessment will be incorporated into the design of the calibration methodology. The exact holding limits would be based on this methodology and defined closer to the time of issuance, taking into account prevailing economic conditions.
Digital Euro rule book and tender process
The Digital Euro Rulebook Development Group has completed a mid-term review of the first draft of the rulebook, which sets out the rules and procedures to standardize digital euro payments across the euro area. The group is expected to deliver an updated version of the digital Euro rulebook by the end of 2024, including the pending chapters, which focus on user identification and authentication and on infrastructure-related requirements.
At the same time, the ECB launched five calls for applications aimed at concluding framework agreements with suitable third-party providers for the provision of digital euro components and related services. The Eurosystem will now continue the selection process by inviting the highest ranked respondents to submit a tender. This process will help determine the final technical details for designing a digital euro.
Supporting the legislative process
As legislative deliberations evolved, the ECB has continued to provide technical expertise to the relevant European institutions. In particular, in support of the ongoing discussions, the ECB has (i) provided technical input on analyzing the dynamics of the euro retail payments market; (ii) published an in-depth technical analysis of the feasibility and implications of allowing multiple digital euro accounts per user, and (iii) carried out additional technical work on a digital euro app with the aim of making it highly inclusive and accessible to make.
“The preparation phase for the Digital Euro is progressing well and we support the ongoing democratic debate on the legal framework for the Digital Euro,” said Piero Cipollone, Member of the Governing Council, Chairman of the High-Level Task Force for a Digital Euro. “The digital euro is a common European undertaking. As such, we will continue to work with all stakeholders, including the European public, to ensure it is successful and benefits us all.”
The Governing Council of the ECB will only decide on the possible issuance of a digital euro once the relevant legislation has been adopted, as this legal framework is essential for the concrete functioning of the digital euro.
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