Today the European Central Bank (ECB) published a digital euro progress report, following the decision to progress to the two-year preparation phase last October. The report gives considerable coverage to the privacy aspects of its central bank digital currency (CBDC), following up on its recent blog post on the same topic that we previously covered. It also covers several practical aspects such as calibrating holding limits, caps on fees and tenders for work.
Tenders for digital euro work
This January the ECB published a vendor call for €1.1 billion worth of contracts for five components. As part of today’s report, this process is seen as one of the main four tasks of the preparatory phase. Establishing framework agreements with suppliers will involve critical design decisions. However, the report states, “These agreements are not in any way a commitment to initiate development, but are simply a preparatory step to ensure the Eurosystem’s readiness should the development and implementation of a digital euro be warranted in the future.” According to the timeline, the ECB will select vendors in Q1 2025 and then start a second round of procurement procedures.
Digital euro holding limits
Previously the ECB floated the idea of a €3,000 holding limit for the digital euro. In today’s progress report the ECB said the final limits would be set based on the economic conditions closer to launch. However, work is progressing to come up with a methodology.
The idea is that users can make larger transactions by linking the digital euro wallet with their bank accounts. Hence, receipts above the holding limit would sweep some of the money into their bank account, and the reverse for payments. While this seems practical, it’s messy from an accounting perspective, including for end users. It’s nice to look at an account and to be able to see what you paid for rather than payments appearing in two places, but that’s by-the-by.
There’s been a lot of research on holding limits within the EU and abroad. For example, De Nederlandsche Bank (DNB) explored the transition period after launch, concluding holding limits are critical.
Commercial banks are keen to see low holding limits to avoid deposits migrating. Another report concluded that a €3,000 holding limit could see up to €739 billion in deposit outflows, but that would only be the case for 100% take up, which is unlikely. The European Banking Federation commissioned the report, which found that with a €3,000 limit and 40% take up, banks could see €8.8 billion in additional funding costs. It provided figures showing a €500 limit would be more benign.
One of the draft digital euro legislation changes transferred responsibility for holding limits from the central bank to the banks themselves. That’s likely a proposal from a member of parliament rather than coming from the ECB. While this sounds attractive for banks, it could favor non-bank payment providers who don’t need to impose limits because they’re not protecting deposits.
Merchant fees
Another contentious topic is compensation for payment service providers (PSP), including banks. The ECB won’t charge for the use of the digital euro, and consumers won’t be charged for payments. However, merchants will pay acquiring fees. In other words, their bank will charge merchant service fees. There are also costs to the consumer’s bank that made the payment. Hence, the merchant acquirer will pay the consumer bank an inter-PSP fee. The ECB plans to cap both the merchant fee and inter-PSP fee.
The ECB has provided technical input on this topic as part of the legislative process. Draft legislation was proposed in mid 2023 and there was quite a bit of activity earlier this year. However, the European elections interrupted the process. We reported earlier this month that the election outcome looks favorable for the passage of supportive digital euro legislation.
