The case for the digital euro and Eurosystem developments - Remarks by Anne Marie McKiernan, Director of Financial Operations at BPFI Understanding the Path Forward with the Digital Euro

16 May 2024 Speech

Anne-Marie McKiernan

Good afternoon everyone,

It’s a pleasure to be here with you all today. 

Let me first extend my thanks to the BPFI, for organising and hosting today’s event – Brian, Gillian and Leah and all your teams. 

It’s great to see the mounting interest in a possible digital euro as a form of retail payment. 

I’d also like to thank our speakers, for your commitment and willingness to share your knowledge, experience and diverse views on this topic.

And to you, our audience, for being with us today, we hope you find the discussions insightful and very much look forward to an engaging session ahead. 

The case for a Digital Euro

I’ll start by recapping on the ‘case’ for a digital euro. Central banks provide the economy and financial system with the safest and most liquid asset: public (central bank) money. Publicly-issued cash in circulation, along with central bank reserves, anchor the monetary and financial system. They play a pivotal role in a well-functioning payment system, and in economic and financial stability. Ultimately, they underpin trust in money, which the whole systems depends on. 

Globally, a high percentage of Central Banks are exploring Central Bank Digital Currencies (CBDC), with some now live. The underlying motivations vary from jurisdiction to jurisdiction, as too does each Central Bank’s core CBDC design principles. In the Eurosystem context, the ECB is wholly committed to ensuring the highest possible standards are met in terms of privacy and security standards, fraud protections whilst also designing a retail means of payment that is inclusive and resilient. These principles are distinguishing characteristics of the ongoing work throughout both the previous and current phases and are reflective of our shared values to our people, and our role in the financial system.   

The widest-accepted means of retail payment in Europe is euro cash, with its unique properties: it is guaranteed by the central bank; it is widely available; it is accepted everywhere in the euro area; it is free of charges; it provides instant settlement of payment obligations and high privacy protection; and it is financially inclusive. 

But, with technological advances and changes in societal preferences, cash payment transactions across the euro area have been steadily declining . The Eurosystem is acutely aware that the role of public money must continue to evolve, to retain its stabilising – trusted - force in the economy and financial system, and also ensure that consumers can continue to pay in the most efficient manner. So, the ECB and National Central Banks (including the Central Bank of Ireland) are preparing for the possible issuance of a digital form of cash – that is, trusted public money in electronic form, for making payments.

A digital euro would complement, and not replace, physical cash. Its design would offer the unique benefits of cash – that is, high levels of privacy, financial inclusion, wide acceptability instant settlement and ability to pay offline.

It would co-exist with other private payment means (cards, contactless, account-to-account payments). It would be the truly pan-European means of digital retail payment. 

To be a success, the digital euro must be trusted, and must bring added value to users, businesses and society alike. Under the current proposed approach: 

  • The use of basic payment services will be free to users (public good). Payment Service Providers (PSPs) will be incentivised, proportionately, to distribute the digital euro, and the Eurosystem will bear the costs of production.
  • It will be guaranteed for acceptance everywhere in the euro area – it will have legal tender status, alongside cash. You won’t have to second guess whether your payment method is accepted, and it will be interchangeable with cash.
  • There will be ability to pay even without access to the internet (the ‘offline’ option), using devices within proximity of each other.
  • It will promote financial inclusion, with the possibility to pay even without a bank account.
  • The technological specifications for digital euro components reflect the highest standards of anti-fraud and privacy, while being technologically resilient. This ‘privacy by design’ is intended to make the digital euro the most secure and private form of electronic payments.

Banks and other payment service providers will obviously have the key role in the distribution of the digital euro, given their customer relationships. We see the digital euro as offering a platform for innovation – payment providers could achieve pan-euro area reach and expand services and use cases, on top of the basic services. There may also be the possibility to leverage other investments –for example, on instant payments - to include digital euro.

Central Banks play a pivotal role in the payments landscape - as the operator of the payments and settlement systems, and as the provider of central bank money to the economy. This, of course, is done in partnership with private sector participants. Harnessing the combined knowledge, expertise and efforts of both public authorities and private intermediaries is needed to make the digital currency a success, as well as realise the long-term benefits of innovation and resilience in general.

Eurosystem Preparations for Digital Euro  

The European Central Bank’s Governing Council approved the start of the 2-year investigation phase in October 2021.  The Investigation phase explored potential use cases for digital euro, and established the potential design principles, which include

  • replicating the unique properties of cash as much as possible, but digitally; 
  • ensuring it is a means of payment, not an investment product; 
  • establishing that digital euro holdings would not be remunerated, just like cash.     

Last October, the Governing Council decided to move to the Preparation Phase, in two parts. The first part has the objective to ‘lay the foundations for the potential issuance of a digital euro and be ready, should a decision be taken to launch in the future’ .  In parallel, work has been ongoing by European co-legislators to develop a dedicated legislative framework for the Digital Euro. A decision to issue a digital euro would be taken only after this legislation has been adopted. In other words, the decision would be considered only in the event there is political backing for its issuance in Europe. 

So, the second part of the Preparation Phase would start when that political decision, by the European Council and European Parliament, would be made to launch digital euro, and implementation thereafter could take up to two years. 

The European Commission’s Legislative Proposal for Digital Euro

In June last year, the European Commission published its draft “Single Currency Package”, which set out the legislative framework for the establishment of the digital euro (as well as the legal tender status for cash). This draft proposal sets out new obligations for distributors of the digital euro, where customers will have additional rights and protections and which intermediaries will need to carefully consider, particularly the possible impact on their current business models, should the EU Council and European Parliament adopt the digital euro legal act.  

The Central Bank works closely with the representatives of the Departments of Finance and Foreign affairs on the progression of the legislative discussions and closely monitors to ensure that all issues are dealt with.  There is a range of other regulatory issues in the payments space that continue to evolve - such as SEPA Inst., PSD3, eIDAS2 – and these are likely to precede any digital euro launch. But they would, crucially, constitute important building blocks for potential issuance, and success, of a digital euro.

The EU Commission has not yet established any formal timeline for the finalisation or adoption of this legislation. Ultimately, commitment and timing is expected to be clearer, after the new European Parliament is constituted following the European elections next month.

Digital Euro and the Financial and Payments System

A key consideration in issuing a digital euro is around the implications of a retail central bank digital currency for the broader European financial system. As already mentioned, the digital euro will be a retail means of payment, not an investment or savings product. Digital euro accounts will have ‘holding limits’, to prevent largescale shifts away from bank deposits – our preparations are focused on ensuring that there will not be bank disintermediation.  A significant body of analysis is underway with our Eurosystem colleagues, to assess possible impacts from a digital euro, on many aspects of the financial sector and on consumer choice. Clearly, there are many variables to consider – including patterns of take-up by customers of digital euro over time, impacts on regulated financial entities and on other payment types (including cash). The body of work includes both quantitative assessments and surveys, and the Central Bank is playing its part in this analysis. A key output will be the decision on a ‘holding limit’ for digital euro wallets, but all the information will be important in ensuring that a digital euro, should it be launched, will be adopted as a new trusted, private, inclusive form of public money. 

Progress towards the planned milestones of the current phase, and significant areas of work include:

  • The launch, in January of this year, of the Calls for Applications, by the ECB to the market, to establish framework agreements with potential providers of digital euro components. These framework agreements would cover aspects such as fraud, risk management, the app and software development, the secure exchange of payment information, and the ‘offline’ component. Other essential components, such as payment settlement, would be sourced internally from the Eurosystem. 
  • Continued experimentation and conducting further analysis on digital euro design and functionalities, as well as ensuring financial inclusion. 
  • The formulation of a digital euro scheme rulebook, which will be brought for public consultation. This Rulebook would define the set of rules, standards and procedures that supervised intermediaries would need to adhere to, in distributing the digital euro. The rulebook development phase has involved relevant finance and payment experts from across the European retail payments market, both public and private. This is the critical input for merchants and payments service providers, to give clarity on how the digital euro could impact them and how to prepare for its launch.

National Payments Strategy and Digital Euro

Nationally, as many of you are aware, the Department of Finance is leading the development of a National Payments Strategy (NPS) for 2024-2030, which will set out the priorities that will help shape the future payment landscape in Ireland. As we said in our submission to the consultation on the NPS, Ireland’s retail payments landscape lags behind other parts of Europe in some areas, which is a priority to address. Ireland is host to a growing and innovative payments sector, and the base of a very innovative technology sector. And people have shown they are willing, and eager, to embrace new technology in payments. For consumers to have greater access to payment solutions depends on the market grasping the opportunities available. We see the digital euro as a key priority for the NPS – it would offer an additional means of payments, adding resilience and choice, value and service for consumers, merchants and businesses in the payments system. The Digital euro design features enhance privacy; they develop anti-fraud and cyber resilience, and they bring better user experience with a fast, easy and cheap payment option.   

Preparing for the Digital Euro 

The Digital Euro is a complex, multi-year project that will represent a significant evolution in the nature of money and require a transformation in market infrastructure and payments technologies, as well as transformation from the perspective of private payments providers. 

I’ve spoken about the preparations underway in the Eurosystem and European Commission on the Digital Euro. What about preparations among financial sector participants? Across Europe, banks and payment providers are considering deeply the issues involved in potentially implementing a new central bank digital currency. Many have been involved in the Eurosystem’s trials and experiments on possible design choices, and have participated in market consultation groups, including the development of the Scheme Rulebook. 

I urge you all to deeply consider the issues from the point of view of your evolving business models, your planned investments and your customer relationships. A project of this scale takes years to design, develop and operationalise. 
The Central Bank will be stepping up its engagement with banks and other payment service providers (PSPs), both bilaterally and jointly, in coming months. This is an opportunity for payment providers to build their understanding of the strategic opportunities that it presents, as well as the likely obligations to be placed on you in the draft regulation. Early engagement to understand the functional and technical requirements in the Scheme Rulebook is an important investment for the future. This means that potential distributors of the digital euro will need to consider possible impacts as part of your broader digitalisation, innovation, business model and capability strategies, in order to be ready.    

The Central Bank of Ireland looks forward to engaging with you and I will shortly be writing to some of you to commence these engagements.

Let me conclude.  A digital euro would be the most significant development in central bank money since the euro itself was launched. It will be as cash-like as is possible for an electronic means of payments, and it will have the highest standards of privacy and anti-fraud in its design, as well as supporting financial inclusion. It represents an opportunity for a truly pan-EU, free-for-basic-use retail means of payments, giving more choice, access and resilience for customers. With all these opportunities come responsibilities, to your business and your customers, and we stand ready to engage with you to ensure that your businesses can be ready to implement this new form of currency, if/when the decision to launch is made. 

Thank you.