Homepeer to peer lendingDespite positive development, digital Euro faces design challenges

Despite positive development, digital Euro faces design challenges

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In the landscape of fintech and crypto technology, the realization of a digital Euro is at a relative snail’s pace.

The European Central Bank (ECB) is not likely to decide on whether a CBDC is necessary until late 2023, although experts believe it is somewhat inevitable. Despite this, Christine Lagarde, President of the ECB,  tentatively projected a digital euro release for 2026. However, there is a long road ahead. 

Jonas Gross, Chairman of the Digital Euro Association (DEA)
Jonas Gross, Chairman of the Digital Euro Association (DEA)

In October 2020, the ECB released a report presenting the case for a Digital Euro and, later in Q4 2021, officially announced the launch of an investigation project. Currently, in the investigation phase, the design of the CBDC is under debate, and the ECB is calling for discussions with industry representatives for varying views. 

“I think these discussions are one of the backbones of a solid digital Euro project,” said Jonas Gross, Chairman of the Digital Euro Association (DEA).

“I think it’s necessary to get some more diverse perspectives around the digital euro than ones the ECB receives within their market advisory group from financial sector experts. With all the people using the digital euro in, the end.”

“It needs a collaborative effort from all these parties to design a product, which is also demanded and addresses the needs currently. This is something I think was lacking in the project until now.”

timeline for digital euro

The ECB released a statement outlining the key objectives of the CBDC on July 13, 2022. They categorized central bank-issued money as “public money” and payments solutions such as giro payments or cards based on commercial bank money as “private money.” 

Leading with the focus on the reinstatement of public money through the introduction of a digital euro, it stated, “The way we pay is becoming increasingly digital. To ensure financial stability in this digital age, it is crucial that we all still have easy access to central bank money, which is the foundation of our currency. The digital euro can achieve that.”

The report outlined concerns that the move from cash to digital payments could instigate instability and a lack of trust in the “monetary anchor” of public money and the euro. Hence, the idea of a digital euro was proposed as an addition to cash to extend the reach of public funds within the digital age.  

USP will drive adoption

The effect of the digital euro on the broader economy could depend on its adoption. Gross explained that previous attempts at CBDCs in Finland and Equador had failed due to a lack of unique selling proposition (USP).

He felt that the current design of the digital euro did not offer users a reason for use that is differentiated from what is already available. 

digital euro use cases

“It’s still uncertain what the unique selling proposition will be,” he said. “It will be included in P2P payments and point of sale payments in E-commerce. But the question is, why should people use it? This is something which is to me personally, today, not fully clear.”

“If we don’t have a clear USP, and people don’t know or are not convinced by the usage, it’s very simple. People won’t use it. Everybody already uses PayPal, Apple Pay, etc., so it will need a strong argument to have people turning to CBDC usage.”

For some, a primary benefit of creating a digital currency will assist in increased financial inclusion. Many consumers currently using cash due to an inability to create a bank account could be served by the digital euro to access digital payments. 

E-Naira, Nigeria’s CBDC, was introduced in October 2021, partly to improve financial inclusion, which was at 45% in 2020.

By May 2022, inclusion had already reached 70%, although development continues to enhance the tool and improve inclusion further. In April 2022, the World Bank agreed that if CBDCs are designed with inclusion in mind, they could be a powerful tool for improvement. 

Privacy high priority for civil service advisors 

However, the balance between increased financial inclusion and compliance with anti-money laundering (AML) measures continues to be debated. Many participants of the ECB’s Civil Society Seminar on shaping the digital euro were concerned by the proposed privacy measures. 

The options of privacy presented by the ECB consisted of three hybrid approaches, discounting a completely anonymous service. All options included varying levels of KYC to access the service. 

digital euro privacy options

In the ECB’s statement of July 13, 2022, one of the fundamental principals stated that the digital euro’s resulting design should benefit those with limited access to digital payments. However, it was unclear to many how the privacy models proposed would support this. 

Martin Schmalzried, Senior Policy and Advocacy Manager at Coface Europe, said, “There’s this hypocritical attitude where the people that are excluded from accessing the bank account are also, in many cases, people that cannot comply with AML. They might be newly arrived migrants or homeless people. So this is it’s a very hypocritical thing to say that AML is what prevents us from doing things when there are sometimes other reasons. Maybe we should rethink AML first.”

Marc Beckmann, a researcher at Positive Money Europe, agreed, “It seems like the ECB privileging compliance with AML and counter-terrorist financing legislation over the compliance with the fundamental right to privacy and existing laws on data protection.” 

Gross suggested alternative ideas that the DEA was exploring. One option included anonymous payments for low-level transactions. 

“It’s technically feasible to have anonymous payments until specific monetary thresholds,” he said. “You don’t have this in the digital world today. Another option could be that you have a payment system that provides offline and online payments.” Both options could provide pathways for the financially excluded to access digital payments. 

No small feat, but political pressure mounting

Although the creation of the digital euro is slow going, the creation of a standardized, universal currency is no small feat. Multiple stakeholders are involved, and in a landscape of digital currency which continues to face uncertain regulation, implementation could be complicated. 

“The digital euro project can, if not designed properly, have a large impact on the financial sector. It has to be designed and rolled out properly,” said Gross. 

However, the race is on, with other major financial centers already well underway with their investigation stages. China started the exploration of a digital yuan in 2014 and has already undergone testing for two years. Other nations are also in different stages of implementation. Those who fall behind could face disadvantages in global trade. 

“I would argue that it should not be delayed further than 2026,” concluded Gross. “There’s mounting political pressure. If we look at China, they are doing a lot, as are other countries. There is a need to react.”

Related:

  • With over five years in the art and design sector, Isabelle has worked on various projects, writing for real estate development magazines and design websites, and project managing art industry initiatives. She has directed independent documentaries on artists and the esports sector and assisted in producing BBC Two’s Venice Biennale: Britain’s New Voices. 

    Isabelle’s interest in fintech comes from a yearning to understand the rapid digitalization of society and the potential it holds, a topic she has addressed many times during her academic pursuits and journalistic career.




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