Ready for the digital euro?

It is intended to supplement cash and be accessible to the population and businesses: the new, digital central bank currency for the euro area or better known as the digital euro. After the first episode of our blog was dedicated to the presentation of the Central Bank Digital Currency (CBDC), in this article we look at possible implications: what are the requirements for the "digital euro" project? What do to financial institutions and financial services providers have to prepare for if the ECB makes this concept a reality?

The ECB, for its part, has already formulated fundamental requirements in its Report on a digital euro. From it, the first trends for the payments and banking sector can be deduced.

• Matching the standard: The provision and processing of the digital euro should be compatible with the existing payment infrastructure – that is, with private payment applications that fit the SEPA and TARGET system.
• Central or decentralised? That is the question: Whether the output and processing is to be realised via a central or decentralised infrastructure (for example, using distributed ledger technology) is still to be decided.
• Security is a must: The fail-safe operation of the processing systems has the highest priority. Services must also be able to withstand cyber attacks.
• Broad acceptance: The digital currency is to be available throughout the euro area, potentially also outside Europe.
• Easier access to means of payment: The digital euro is intended to promote financial inclusion and is also intended for those EU citizens who do not have access to a bank account.
• Right approach to customers: Intermediaries, such as financial institutions, should use their expertise to provide their customers with access to the digital euro and to provide additional services regarding the digital euro.
• Complies with the regulations: Compliance and regulatory aspects must be fulfilled. This ranges from anti-money laundering (AML) to the Payment Services Directive 2 (PSD2).
• User-friendly: Whether via an app or an additional device: for citizens, the digital euro must be easy to understand and intuitive to use. Of course, the digital euro is meant to protect the privacy and not create additional fees. The new means of payment will be used both at the point of sale and for payments on the Internet.

Big agenda without big bang

The requirements make it clear that this is a major joint project between financial institutions, other payment institutions and the ECB, which cannot be implemented in a big bang but must be realised in a long-term, step-by-step process. Nevertheless, a strategic preparation is key. Thus, a number of questions must be answered. If the ECB were to decide on a decentralised infrastructure, how would it be mapped? Can the existing infrastructure be used or are technical preparations necessary? Is a completely new infrastructure needed? Financial institutions should also analyse whether their payment systems are at the necessary maturity level for the settlement of digital central bank funds. If not, it may be necessary to take corrective action. This also applies to the required user interfaces that are necessary so that private consumers and corporate customers can use the digital euro. In addition, the decision-makers should think about the processes and design of these interfaces. It is best to keep in mind the ECB's goal of making the digital euro as easy-to-use as possible for the end consumer. Considerations are also useful for the design of the payment process in off- and online retail. An interesting question here is how the digital euro can be used offline? Last but not least, it is important to consider whether the digital euro can open up new business models. It is certainly beneficial to have a plan ready when the ECB gives the go-ahead.

Author: Anja Kamping