Today the EU’s parliamentary Committee on Economic and Monetary Affairs held a meeting that discussed the digital euro. An updated draft of the digital euro legislation reveals several key changes. They include support for permissionless blockchains.
The draft legislation states, “Conditional payments in Digital Euros may also be carried out on permissionless distributed ledgers where until now only privately issued assets like crypto-assets or stable coins are available as a means of payment. With the approval and under conditions set by the European Central Bank, the Digital Euro would be made available as a token to be referenced on these chains.”
The central bank and European Council previously stated they don’t want programmable money at the base layer, so the legislation now specifies conditional payments will happen in the “layer above”.
Major changes on holding limits, fees
Banks had a number of objections to the digital euro and most have been addressed. There were concerns about a possible €3,000 holding limit being too high and resulting in a drain on bank deposits. They argued for a €500 limit. The latest draft law transfers decision-making responsibility for the holding limits from the European Central Bank (ECB) to the banks and payment service providers (PSPs) themselves. It suggests they might want to set the amount as the equivalent to daily cash withdrawal limits on client debit or credit cards, but it doesn’t prescribe it.
On the face of it, this is a big win for the banks. However, this also applies to non-bank payment providers. Since non-banks aren’t deposit takers, they aren’t worried about losing deposits. So, they could offer very high holding limits, potentially putting banks at a competitive disadvantage.
There are also concessions on fees. A CBDC is not dissimilar to debit and credit cards in that you have merchants and consumers and money has to be moved between them. Hence, there’s a need for inter-PSP charges. The legislation previously prescribed how this might be set: cost plus a reasonable profit margin. Now the market will decide the inter-PSP fees.
Banks were also concerned about potentially not being able to recoup digital euro costs. The legislation acknowledges their need to cover implementation costs as part of the inter-PSP fees.
The ECB wallet is optional
Another concern was that the ECB’s wallet user interface would have to be used rather than payment providers’ proprietary wallets. The ECB has clarified that this is not the situation, and the law specifies that only payment providers without their own wallets are required to use the ECB wallet.
In the previous draft legislation, banks were required to provide digital euro services, but it was optional for other payment service providers. Now the requirement also applies to most PSPs.
A nod to ECB conflicts of interest
The Institute of International Finance (IIF) and other parties have noted that the ECB has multiple potential conflicts of interest with the CBDC. As a retail deposit taker, the central bank will compete with the private sector but also supervises banks.
Hence, a new clause in the draft legislation requires a dedicated Digital Euro unit within the ECB that is “independent in terms of accounting, organisation, and decision-making processes.”
Access to central bank money for DLT Pilot Regime and MiCAR?
The new digital euro text also mentions access to central bank money relating to the new crypto regulation MiCAR. This may aim to support the digital euro for conditional payments on permissionless blockchains or something else. Here’s the clause:
The use of the Digital Euro under EU Digital Finance Framework
In accordance with the Treaties, the European Central Bank and the national central banks shall seek to ensure the smooth functioning of the payments and systems between financial intermediaries, payment service providers and other market participants to support the use of central bank money for financial market infrastructure activities under the Regulation (EU) 2022/858 (DLT Pilot Regime) of the European Parliament and the Council and Regulation (EU) 2023/1114 (MiCAR).
The mention of the DLT Pilot Regime is unsurprising as the Eurosystem is about to start wholesale payment trials for DLT settlement with central bank money.
Meanwhile, European Central Bank (ECB) board member Piero Cipollone provided an update to the Committee.
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Update: Several additional details were added after initial publication
