Europe is turning to the digital euro, but ‘less privacy by default’ could see it catch up


The European Commission (EC) has issued a rallying cry for fintech experts to reflect on the prospects and potential of a digital euro. It’s a topic that’s been at the center of a lot of debate, but this latest decision opens up the prospect of something more deliverable, even though a number of political decisions have been made alongside the technology decisions.

The Commission’s Directorate-General for Financial Stability, Financial Services and Capital Markets Union is seeking views and opinions from stakeholders on the likely impact a European Central Bank currency would have on providers financial services, retail users and the general public. In the announcement of the consultation, the Commission states:

For a digital euro to be used as a single currency, alongside euro banknotes and coins, a regulation by the co-legislator would be required, on a proposal from the Commission, on the basis of Article 133 TFEU. For the regulation, an impact assessment will be prepared, which will be supported by consultations carried out by both the Commission and the ECB. This targeted consultation complements the ECB’s public consultation. It aims to collect additional information on the expected impacts on key industries (financial intermediation, payment services, merchants), users (consumer associations, retailer associations), chambers of commerce and other players in international trade.

The consultation will cover a number of key perceived concerns, including:

  • User needs and expectations for a digital euro.
  • The role of the digital euro for European Union (EU) retail payments and the digital economy.
  • Make the digital euro available for retail while continuing to preserve the legal tender status of euro cash.
  • The impact of the digital euro on the financial sector and financial stability.
  • Application of the rules against money laundering and the financing of terrorism (AML-FT).
  • The privacy and data protection aspects of a digital euro.
  • International payments with a digital euro.

Privacy issues

The introduction of such a digital currency has been debated for some time. Last year, the Euro Summit – which provides political guidance to ensure the smooth functioning of the Economic and Monetary Union – encouraged further exploration of how a digital euro might work, saying:

We support the strengthening of the international role of the euro with a view to strengthening 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 this 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 continued.

Meanwhile, Fabio Panetta, a member of the executive board of the European Central Bank (ECB), to whom any implementation would fall, told the European Parliament’s Economic and Monetary Affairs Committee last month:

The main purpose of a digital euro is to maintain the accessibility and ease of use of central bank money in an increasingly digitized economy. But for a digital euro to fulfill this role, people must be able and willing to use it. From the outset, I stressed that a digital euro can only succeed if it meets the payment needs of Europeans today and tomorrow.

To that end, the ECB conducted its own focus group research to gauge the bloc’s mood. According to results to date, respondents cite the ability to pay anywhere as the top benefit of a digital currency, followed by instant and easy contactless payment technology. It’s quite simple. Where things get tricky is the third most cited user need – privacy controls. On this point, the ECB observes bluntly:

A gradual shift to digital payments means less privacy by default.

How this particular circle should be squared off is clearly a major challenge – and based on how long it has taken other privacy concerns across the EU, this is an issue that could hold back further lots of progress for a while. .

For its part, the ECB reached preliminary conclusions which it shared this week with EU finance ministers for consideration. These include:

  • User anonymity would not be useful as it would make it impossible to monitor the amount of digital euros in circulation or prevent money laundering.
  • The Eurosystem – the monetary authority for the eurozone – should only be able to see the minimum transaction data required to validate digital euro payments.
  • Anonymised/aggregated data on the use of the digital euro should be made available to the Eurosystem, regardless of the confidentiality option, for statistical, research, monitoring and surveillance purposes.

But back to the question of “squaring the circle” and it is clear that the ECB is not about to carry this burden alone. It is up to politicians to make a decision about the balance to be struck between privacy needs and technological capabilities. In a revealing comment, it is emphasized that the Eurosystem is committed to enabling high standards of confidentiality”so politically desired”.

For his part, the ECB’s Panetta said:

It’s no surprise that people expect digital euro payments to ensure high privacy standards. As payments go digital, private companies are increasingly monetizing payment data.

We already provide cash, the payment instrument with the highest level of confidentiality. We are committed, as a public institution, to maintaining the trust of citizens in this area if a digital euro is issued.

At the same time, we need to assess privacy protection in the context of other EU policy objectives, such as the fight against money laundering (AML) and the fight against the financing of terrorism (CFT) . Concerns about circumventing regulations, including to circumvent international sanctions, have become even more prominent recently, especially with regard to crypto-assets.

Over the past few months, we have explored various options to find a compromise between maintaining a high degree of confidentiality and other important public policy objectives…there are important political choices to be made, which makes our dialogue with [politicians]crucial.”

Of course, all of this has to be seen in the broader context of what other non-EU countries are doing. Can Brussels afford to let the US or China take the lead here and end up fighting yet more regulatory battles with Washington and Beijing in an effort to put a European footprint in the sand? So what are other countries doing? This is the subject of a second article here.


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