The proposed digital euro continues its development after the publication of a legislative proposal in June 2023 (which we reported on and discussed here).
Recently we have seen the decision by the European Central Bank (ECB) to continue to the next stage of preparation for the digital euro and a joint opinion released by the European Data Protection Board (EDPB) and the European Data Protection Supervisor (EDPS) calling for several related recommendations.
The proposed digital euro continues its development after the publication of a legislative proposal in June 2023 (which we reported on and discussed here). Recently we have seen the decision by the European Central Bank (ECB) to continue to the next stage of preparation for the digital euro and a joint opinion released by the European Data Protection Board (EDPB) and the European Data Protection Supervisor (EDPS) calling for several related recommendations.
The ECB Decision
On 18 October 2023, the ECB announced that it would begin the preparation phase for the digital euro, which is aimed at laying the foundations for the digital euro. This phase will include the finalisation of a digital euro rulebook, as well as selecting providers to develop the digital euro infrastructure.
The press release was accompanied by the ECB’s report into the investigation phase of the digital euro, and it notes that the ECB intends the digital euro to be a digital form of cash that can be used for all digital payments through the Euro area. The system would be widely accessible, free for basic use, available both online and offline and will allow for instant settlements.
The ECB stressed the importance of data protection within the design of the digital euro, noting that the Eurosystem will have no visibility of user’s personal data nor the ability to link payment information to individuals.
The digital euro will be accessible through a user’s payment service provider’s app, or a digital euro app provided by the Eurosystem. For those users who do not have a bank account or access to a digital device, a card will be provided that can be used to pay with digital euro, with services such as post offices being able to provide such cards. Users will be able to exchange the digital euro for cash (or vice versa) at ATMs and cash machines.
The Preparation Phase
The preparation phase of the digital euro begins on 1 November 2023 and will initially last 2 years. The preparation phase will involve significant testing of any proposed digital euro system and its infrastructure to ensure it meets the requirements for user experience, privacy and financial inclusion.
After the initial 2 years, the ECB will decide whether to move to the next stage of the digital euro development process. The ECB has stressed that the launch of this preparation phase is not a decision to issue a digital euro, as that decision will only be taken once the legislative process surrounding the digital euro has been completed.
The EDPB & EDPS Opinion
The EDPB and EDPS have issued a joint opinion on the proposed Regulation on the digital euro (Opinion).
The Opinion welcomes the fact that users will always be able to either pay through digital euro or in cash and that the digital euro would not be “programmable money” i.e. it cannot have conditions attached to its use through smart contracts. The Opinion also welcomes the fact that the digital euro legislation is committed to providing a high standard of data protection for users.
The Opinion does have several recommendations for the digital euro, focusing on:
• Digital Euro Unique Identifiers.
• Settlement Infrastructure.
• Fraud Detection and Prevention Mechanisms (FDPMs).
While the Opinion welcomes the fact that the digital euro would be carried out in a decentralised manner, the Opinion requests that further clarifications on the modes of distribution be provided.
Digital Euro Unique Identifiers
More clarification has been requested regarding the necessity and proportionality of the use of a single access point for digital euro unique identifiers, and an explanation as to how this complies with the privacy by design principle. The Opinion also requests that clarifications be provided as to how personal data would need to be processed by payment service providers to enforce the proposed holding limits.
On the settlement infrastructure to be used, the Opinion states that the legislation should include a binding obligation to ensure that all transaction data between the ECB and Central Banks is pseudonymised.
On the use of FDPMs between the ECB and private payment service providers, there is a concern regarding which tasks would be performed by the ECB and what tasks would be performed by the payment service providers. The EDPB and EDPS are of the view that this undermines legal certainty and may obscure the ability to assess the necessities of FDPMs. The Opinion requests that the legislators provide further evidence of the necessity of FDPMs and provide clear and precise rules on the scope and application of FDPMs.
The Opinion refers to the fact that there could be potential risks from an IT and cybersecurity perspective and recommends including references to the applicable EU cybersecurity legal framework within the legislation.
It appears that the digital euro is going ahead, and we are all currently awaiting details on the practical workings of the digital euro, but if the EDPB’s and EDPS’ concerns are not addressed, the digital euro may receive significant pushback on the legislative front, delaying its adoption.
If you wish to discuss any of the above, please get in touch with one of the Key Contacts listed or your usual William Fry contact.
Contributed by Conor Forde