Will financial institutions play a role in the implementation of the digital euro?

The European Central Bank's (ECB) two-year analysis phase on the digital euro is not yet over and many questions are still unanswered. However, there are already initial tendencies on some issues, such as the implementation model or the distribution of roles.

Considering the basic prerequisites of a central bank digital currency (CBDC), such as cash-like security, privacy protection, user-friendly peer-to-peer payments and widespread distribution, various implementation scenarios are currently being discussed.

In this article we will look at two common implementation scenarios:

1. Direct CBDC

In the direct approach, the European Central Bank would develop the digital euro on its own and be the interface to the users.

Consequently, the ECB is responsible for setting up the infrastructure, operating the system, performing the customer onboarding and processing the payments.
All of these issues result in enormous efforts on the part of the ECB, since in addition to the development of the back and front end, the subsequent administration and management also await the ECB. For example, customers need to be guided through processes such as KYC and AML checks. Furthermore, it remains open whether users in this model would receive a separate account at the ECB for payment activities.

In addition to the effort and time factors, the current ecosystem would be undermined, as neither commercial banks nor financial service providers would act as distributors at the customer-bank interface.
 
The indirect CBDC scenario is therefore far more likely:

2. Indirect CBDC

In this model, the digital euro is issued by the ECB and distributed to the end consumer via verified intermediaries, for example financial institutions and payment service providers. The distribution would be similar to the current cash system but in digital form. Consequently, the user has no direct contact with the central bank, but has a direct legal claim against it.

The model would strengthen the existing ecosystem by securing the role of intermediaries and involving them in the provision of the digital euro.
In addition to the administration, intermediaries would be able to build on established processes (including KYC and AML checks), onboarding mechanisms and front-end developments.
In this model it must also be considered that the further development of value-added services can arise in connection with existing use cases of the financial institutions and the digital euro. The ability to innovate is increased and consumers can hope for an optimised user experience.

For the reasons mentioned, we currently assume that the commercial banks will be involved in the distribution of the digital euro in order to use established processes and strengthen the direct customer contact. However, the question remains open as to whether other providers besides classic commercial banks can also take on the role of an intermediary.

At PPI, we are following this topic with great enthusiasm and consider the innovative capacity of the payments system as indispensable for the economy. To keep you up to date on current developments, we will use this blog to regularly inform you about news on the digital euro.