Security, resilience and privacy

In assessing the progress of work on the digital euro, the Group is of an opinion that the new currency should complement, not replace, cash, be secure and resilient, provide a high level of privacy, be easy and convenient to use, and be widely available to the public. EU finance ministers also called for consideration of the environmental implications of the design of the digital euro.

Preserving the privacy of users of the digital euro should be a key issue in the design. However, it will be important to ensure this is consistent with the need to prevent money laundering, illicit financing, tax evasion and to ensure compliance with sanctions.

Mitigate and monitor risks

According to Finextra, the Eurogroup members suggest a risk-based approach for less risky financial transactions, i.e. more privacy for users. They also supported exploring offline functionality to serve a wider range of use cases and also contribute to faster financial integration into existing systems.

Interoperability with other European Central Bank (ECB) digital currencies, including for cross-currency transactions, is seen as a touchstone for the future functioning of the digital euro.

"This will also take into account the development of other central bank digital currencies (CBDCs) and uttilize the potential benefits of faster, cheaper and more secure cross-border transactions. On the other hand, the risks associated with the use of the digital euro outside the euro area need to be mitigated and monitored," the Eurogroup said.

Britons are sceptical about digital currency

The preliminary approval of the project across the eurozone, where 20 member states currently pay with the euro, contrasts with the more critical approach in the UK. The conclusion of last year's House of Lords debate on the digital euro was that there was no compelling case to create digital currency of a central bank in the United Kingdom.

The Governor of the Bank of England bank, Andrew Bailey, recently questioned the need for a wholesale central bank digital currency given the current modernisation of the payment infrastructure taking place in the UK. Nor is he convinced of the need for change in retail payments. "We need to be very clear about the problem we are trying to solve here before we get carried away with technology and ideas," he said.

Tony Yates, a former adviser to the Bank of England, also warned against the development of digital currencies. He questioned the motivation behind the development of the CBDC, and called the process suspect, according to the Financial Times. "I find out that some people are doing it for the vague notion that CBDCs are the future. Others are worried that central banks that do not create CBDCs will lose out in the use of a global currency," he said.

Five new helpers

Notwithstanding the negative feedback from the British Isles, the European Central Bank has been working hard to develop a prototype of its own digital currency. Last October, chose five partners out of 54 applicants to help it do so.

Spanish bank CaixaBank will focus on producing a prototype for P2P online payments using the digital euro. Over the next few months, it will develop a mobile app simulating the steps individuals will need to take to transfer digital euros to their account and to transfer digital euros to others.

French multinational payment and transaction services company Worldline will be responsible for the development of P2P offline payments. Italian bank Nexi, which specialises in payment systems, will work on in-store payments. Other partners for the ECB will be US technology giant Amazon and patent institution EPI.

The research phase of the project will end in July 2023

The Digital Euro Project is currently in the second year of its research phase. "The aim is for the digital euro to play the role of a risk-free, accessible and efficient form of central bank money," said ECB President Christine Lagarde. Protecting the privacy of users of the new currency and trusting the security of the system, and the institutions that will work with it, will be key. The research phase of the project is expected to last until July this year, after which the ECB should decide whether or not to launch the project.

Digital wallets and new legislation

The project leaders have long argued that the role of the digital euro is not to replace the physical money that has been used so far, but to expand the possibilities of handling funds.

Residents of countries that pay in euros will need to own digital wallets, which will become part of their digital accounts. They will be set up by the central banks of each Eurozone member state or by entities they designate for this purpose. Financial communication will be via apps. Every citizen will be able to convert physical cash into digital currency and vice versa on a 1:1 basis.

In parallel with the development of financial technology, which is the responsibility of the ECB, the European Commission is also working on legislation on the digital euro and full coverage of instant payments across the European Union. The new and uniform legislation is expected to see the light of day in 2023.