Europe looks towards the Digital Euro, but "less privacy by default" may leave it playing catch-up
- What chance a Digital Euro? Privacy is going to be a big barrier to jump on the way...
The European Commission (EC) has issued a rallying cry for fintech experts to weigh in on the prospects and potential of a Digital Euro. It’s a subject that’s been at the center of a lot of debate, but this latest move opens up the prospect of something more deliverable, albeit once a number of political decisions have been made alongside the technology ones.
The Commission’s Directorate‑General for Financial Stability, Financial Services and Capital Markets Union wants views and opinions from stakeholders on the likely impact that a European Central Bank currency would have on financial services providers, retail users and the general public. In the announcement of the consultation, the Commission states:
For a Digital Euro to be used as the single currency, concurrently with Euro banknotes and coins, it would require a Regulation of the co-legislator, upon a proposal by the Commission, on the basis of Article 133 TFUE. For the Regulation, an impact assessment will be prepared, which will be supported by consultations carried out y both the Commission and the ECB. The present targeted consultation complements the ECB’s public consultation. It aims to collect further information on expected impacts on key industries (financial intermediation, payment services, merchants), users (consumer associations, retailers’ associations), chambers of commerce and other stakeholders in international trade.
The consultation will cover off a number of perceived key concerns, including:
- Users’ needs and expectations for a Digital Euro.
- The Digital Euro’s role for the European Union’s (EU) retail payments and the digital economy.
- Making the Digital Euro available for retail use while continuing to safeguard the legal tender status of Euro cash.
- The Digital Euro’s impact on the financial sector and the financial stability.
- Application of anti-money laundering and counter terrorist financing (AML-CFT) rules.
- The privacy and data protection aspects of a Digital Euro.
- International payments with a Digital Euro.
The introduction of such a digital currency has been debated for some time. Last year the Euro Summit - which provides policy guidance to ensure the smooth functioning of the Economic and Monetary Union - encouraged further exploration of how a Digital Euro might work, stating:
We support strengthening the international role of the Euro with a view to enhancing our strategic autonomy in economic and financial matters while preserving an open economy, contributing to the stability of the global financial system, and supporting European businesses and households. To that end, we…call for a stronger and more innovative digital finance sector and more efficient and resilient payment systems. In this context, exploratory work on the possible introduction of a Digital Euro should be taken forward.
Meanwhile last month Fabio Panetta, Member of the Executive Board of the European Central Bank (ECB), under whose competence any implementation would fall, told the Committee on Economic and Monetary Affairs of the European Parliament:
The primary aim of a digital euro is to maintain the accessibility and usability of central bank money in an increasingly digitalised economy. But for a digital euro to fulfil this role, people need to be able and willing to use it. From the outset, I have stressed that a digital euro can only be successful if it meets the payment needs of Europeans today and in the future.
To that end the ECB has carried out its own focus group research to assess the mood of the bloc. According to the results to date, those polled cite the ability to pay anywhere as the top benefit of a digital currency, followed by instant and easy contactless payment tech. That’s all pretty straightforward. Where things become more complicated is the third most cited user need - privacy controls. On this point, the ECB observes starkly:
A gradual shift to digital payments implies less privacy by default.
How this particular circle is to be squared is clearly a major challenge - and on the basis of how long other privacy-related concerns have taken to work themselves through in the EU it’s one that could put the brakes on much progress for some time to come.
For its part, the ECB has come to some preliminary conclusions that it’s shared this week with EU finance ministers for their consideration. These include:
- User anonymity would not be useful as it would render it impossible to control the amount of Digital Euros in circulation or to prevent money laundering.
- The Eurosystem - the monetary authority of the Eurozone - should only be able to see the minimum transaction data required to validate payments in Digital Euros.
- Anonymized/aggregate data on the use of the Digital Euro should be available to the Eurosystem under any privacy option for statistical, research, supervisory and oversight purposes.
But back to the question of ‘squaring the circle’ and it’s clear that the ECB isn’t about to carry that burden on its own. It’s up to the politicians to come to some kind of decision around what balance will be struck between privacy needs and technological capabilities. In a telling comment, the point is made that the Eurosystem is committed to enabling high privacy standards “if politically desired”.
For his part, the ECB’s Panetta says:
It is not surprising that people expect payments in Digital Euro to guarantee high privacy standards. As payments go digital, private companies are increasingly monetising payment data.
We already provide cash, the payment instrument with the highest level of privacy. We are committed, as a public institution, to retain people’s trust in this area if a digital euro is issued.
At the same time, we need to assess privacy in the context of other EU policy objectives, such as anti-money laundering (AML) and combating the financing of terrorism (CFT). Concerns about regulations being circumvented, including to bypass international sanctions, have become even more prominent recently, notably in relation to crypto-assets.
Over the past few months we have investigated various options to address the trade-off between retaining a high degree of privacy and other important public policy objectives…there are important political choices to be made, which makes our dialog with [politicians] crucial.”
Of course, all of this needs to be seen in the wider context of what other non-EU countries are doing. Can Brussels afford to let the likes of the US or China take a lead here and end up fighting yet more regulatory battles with Washington and Beijing in an attempt to stamp a Euro-footprint in the sand? So, what are other countries up to? That’s the subject of a second article here.