On 28 June 2023, the Commission published its Single Currency Package, as part of the EU's digital transformation initiative. This is in line with the current global trend of establishing central bank digital currencies ("CBDCs") with more than 100 central banks worldwide evaluating their possibilities for introducing CBDCs.

As a digital form of central bank money, the digital euro offers greater choice to consumers and businesses in situations where physical cash cannot be used. Current trends show that people are increasingly opting for digital forms of payment, a change accelerated by the Covid-19 pandemic and the rise of cryptocurrencies and stablecoins. The next logical step towards maintaining the Euro's status is to integrate it into the digital sphere.

The Commission's package proposal comprises of two mutually supportive measures:

  • A legislative proposal on the legal tender of euro cash, aiming towards ensuring that cash remains easily accessible and widely accepted in the euro area through a regulation on the legal tender of euro banknotes and coins; and
  • A legislative proposal establishing the legal framework for a digital euro with the publishing of two complementary regulations: the regulation on the establishment of the digital euro ("Digital Euro Regulation") and the regulation on the provision of digital euro services by PSPs incorporated in Member States whose currency is not the euro.

Public or central bank money and private money are continuously interacting with each other through conversions since private money can be transformed into the same amount of central bank money and vice versa.

The digital euro is intending to bridge the gap between private and central bank money by having a digital variant of the euro cash which shall be convertible at par. The objective of the Digital Euro Regulation is to allow for the European Central Bank ("ECB") to issue public money in electronic form, allowing for both the digital and the physical euro to coexist.

According to the Digital Euro Regulation (the "Regulation"), the right to authorise the issuance of the digital euro will be exclusively reserved to the ECB. Thus, with central bank backing, the digital euro will be different to crypto-assets or stablecoins since it will be risk-free, have a high level of respect for user privacy, act as a reliable medium of exchange and have its value maintained by central institutions.

Key Features of the Digital Euro Framework

  • Legal tender status – The Regulation confirms the digital euro's legal tender status, meaning that it can be used as a mode of payment to execute payment obligations and its acceptance is mandatory by payees. Furthermore, the digital euro's legal tender status is guaranteed for both offline and online payments of monetary debts denominated in euro within the euro area. Nevertheless, certain exceptions to the digital euro's mandatory acceptance are outlined in the Regulation where for instance small enterprises and non-profits will be entitled to refused payment in digital euro unless they accept comparable digital means of payment, or where the payee is a natural person acting in the course if a purely personal or household activity.
  • Access – Users will be able to easily access their digital euro by creating a payment account which will work similar to a digital wallet which can be topped up with digital euro. The Regulation sets the framework for the creation of these payment accounts which users will be able to open without any requirements to have a bank account with any financial institution. Those individuals who do not have a bank account would be able to open and hold a digital euro payment account with a post office or public authority designated by the individual Member States. A striking feature of these payment accounts is that payers and payees will be able to transact both online and offline, making the usage of the digital euro as easily accessible as physical cash.
  • Role of PSPs in distribution – PSPs will be trusted with providing clients all the basic digital euro payment services, particularly with opening and holding the digital euro payment account. The Regulation sets out the role PSPs should take in the provision of digital euro payment services and Annex I to the Regulation lists the basic digital euro payment services which PSPs shall be expected to provide to digital euro users at no charge. Users of digital euro payment services will thus be entering into a contractual relationship with PSPs as intermediary service providers and not the ECB or a national central bank.
  • Privacy – One of the most attractive features of the proposal is the promise of a high level of data privacy. With online digital euro payments, PSP would only have access to that personal data needed to perform the payment and that required to prevent money laundering and fraud, a similar situation as with credit card payments. Offline payments will offer even stronger privacy as PSPs will only be able to see that a transfer of digital euro has been made, providing the same level of privacy as when cash is deposited or withdrawn from ATMs. Payment information will only be known to the payer and payee and the ECB has made it clear that it has no interest and intention of collecting, storing or sharing payment data and tracing payment behaviour.
  • Holding limits – The Regulation provides that a maximum amount of digital euro that can be held in a payment account at any one time shall be imposed in order to limit the use of the digital euro as a store of value. This limitation will also protect financial stability and avoid any substantial deposit outflows from banks. The Commission has confirmed that users will likely be able to exceed this ceiling by linking their digital euro payment account to their personal bank account.

Since the proposal's publication, the ECB has released a press release welcoming the Commission's legislative proposal. Important technological aspects are yet to be decided as the Eurosystem is still in the process of evaluating different approaches and technologies it should take to making the digital euro available.

Industry feedback is welcome until 7 September 2023, following which, a legislative debate will take place.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.