ECB enters next phase for digital euro: The preparation phase
On 18 October 2023, the European Central Bank (ECB) took another step towards launching the digital version of the euro. The ECB announced its intention to move to the next phase of the digital euro project, the preparation phase.
Background
The announcement marks the completion of a two-year investigation phase which launched in 2021 and explored the design and distribution model for the digital euro. In its announcement, the ECB published a report which details its findings from the investigation phase and the ECB has also since published an opinion and technical working document on the proposal for a regulation on the establishment of the digital euro.
Based on the findings included in the report, the ECB has designed a digital euro that would be widely accessible to both individuals and businesses and its use facilitated by supervised intermediaries, such as banks and payment institutions.
Proposed design of the digital euro
The proposed design of the digital euro envisages it to:
- be a digital form of cash that could be used for all digital payments throughout the euro area
- be widely accessible, free for basic use and available both online and offline
- offer the highest level of privacy
- allow users to settle payments instantly
- be used from person to person, at the point of sale, in e-commerce and in government transactions.
Next steps
The preparation phase commenced on 1 November 2023 and will initially last two years. The preparation phase will lay the foundations for a potential digital euro and will involve finalising the digital euro rulebook and selecting providers that could develop a digital euro platform and infrastructure. It will also include testing, experimentation and continued engagement with the public and relevant stakeholders to develop a digital euro that meets both the Eurosystem's requirements and user needs.
While the launch of the preparation phase is not a decision on whether to issue the digital euro, it will pave the way for a potential future decision. This decision will only be made once the European Union’s legislative process has been completed.
Our view is that there is a lot to be done before the digital euro becomes a reality, both in terms of agreeing on its functionality and how it will be operationally facilitated by regulated financial service providers in the financial system. It is clear from our interactions with those designing the digital euro that this point is acknowledged. That said, the initiative can still be viewed positively in that it would increase consumer choice in relation to payment methods. It also proposes some innovative solutions, such as offline payments which, will mitigate some of the privacy concerns around this project.
Key contacts
For more information please contact Patrick Brandt (Partner), Kevin Allen (Partner), Christopher Martin (Of Counsel), Louise Hogan (Associate), Sarah Lee (Senior Knowledge Lawyer) or any member of ALG's Financial Regulation Advisory team.
Date published: 21 November 2023