A digital euro that serves the needs of the public: striking the right balance

Introductory statement by Fabio Panetta, Member of the Executive Board of the ECB, at the Committee on Economic and Monetary Affairs of the European Parliament

Brussels, 30 March 2022

Thank you for inviting me to update you on the digital euro project and the progress made since we last met in November.

We have previously discussed the broad policy objectives associated with a digital euro.^[1] Today, I would first like to highlight some important features which, by making a digital euro attractive to citizens and merchants alike, would help us to achieve these objectives.

I will do so by discussing the findings of the focus groups we held – which we are publishing today on the occasion of this hearing^[2] – and our analysis of “use cases” for the digital euro. In the jargon of payments, this term refers to the payment segments that a digital euro could serve.

I will then present our preliminary findings on how to reconcile the right to confidentiality with the public interest in countering illegal activities, continuing the discussion we had a year ago.^[3]

Meeting the payment needs of Europeans today and tomorrow

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.

The findings of our focus groups provide valuable input here, though we are mindful of the natural limitations of qualitative analyses of this kind.^[4]

The focus groups suggested that people see the ability to “pay anywhere” as the most important feature of a new digital payment instrument. This emerged in all countries and age groups. It means that, ideally, all merchants across the euro area – both in physical stores and online – would need to accept a digital euro. 20 years ago, the introduction of euro banknotes made it possible for us to pay with physical euros anywhere in the euro area. So it is no surprise that people expect to be able to use the digital complement to banknotes wherever they can pay digitally or online.

Instant, easy, contactless payments, especially for person-to-person payments, were the second-most valued feature. Cash has so far remained dominant in person-to-person payments. And we will ensure that people continue to have access to cash. But the focus groups confirm previous findings: preferences are shifting towards digital payments.^[5] The experience of countries both inside^[6] and outside^[7] the euro area shows that contactless person-to-person payments may grow very rapidly when convenient digital solutions become available.

Participants in the focus groups would like to see a solution that would allow instant person-to-person payments regardless of the platform used by the payers and payees. Today, making mobile payments to friends at the click of a button – for example when splitting bills in restaurants or collecting money for a gift – is often easiest when everyone is using the same app. Participants therefore envisaged a one-stop solution that would reduce the need for multiple cards, devices and identification methods and give them access to a range of payment options on a single device.

Our focus groups also confirmed what I called “rational inattention” during our exchange in November.^[8] People tend not to pay attention to – or understand – the difference between the digital euro and the euros they already spend using private digital means of payment. For the financial system to work smoothly, public money and commercial bank money are meant to be fully interchangeable yet distinguishable. People do not think twice about storing and using their money via private intermediaries because they know they can regularly go to the cash machine and withdraw banknotes without any problems. This provides tangible proof that their money in the bank is safe. Convertibility with central bank money on a one-to-one basis therefore anchors people’s confidence in private money, supporting its wide acceptance.^[9]

The findings from focus groups were also used to validate our selection of possible use cases of a digital euro.^[10] We identified them by looking both at our policy objectives and at the importance of different market segments.

Physical stores are the most important market segment for digital payments, accounting for more than 40 billion transactions in the euro area in 2019.^[11] E-commerce payments are less numerous but are expected to continue to grow rapidly in the coming years.^[12] These segments are served by a multitude of payment solutions, often with only domestic reach. So far, they have been dominated by non-European providers and technologies.^[13]

Given their importance now and in the future, payments in e-commerce and physical stores, as well as person-to-person payments, are natural candidates to be prioritised among the possible use cases of a digital euro. The digital euro could also be used for payments between governments and individuals, for example to pay out public welfare allowances or to pay taxes.^[14]

If a digital euro offered these payment options, we would achieve network effects, continue to ensure public access and full usability of central bank money for digital payments, and help to address sovereignty concerns. In the next steps of our investigation phase, we will therefore focus on assessing the actual feasibility of these use cases.

But we will leave the door open to the inclusion of other use cases in the future. We are monitoring emerging trends such as machine-to-machine payments.^[15] And we are looking into solutions to respond to these trends in future releases of a digital euro.^[16]

In the coming months, and building on the findings of the focus groups, we will carefully investigate how to design an attractive digital euro product that responds to the expectations of payers and payees alike.

Co-legislators have a key role to play. For instance, the ability to pay with digital euro anywhere could be fostered by giving it legal tender status. We are thoroughly and carefully analysing this issue together with the European Commission. We stand ready to discuss the matter further with you, also on the basis of the outcome of the upcoming consultation on digital euro the Commission has recently announced.

The trade-offs between privacy and other EU policy objectives

The legal framework will also be key when it comes to privacy, which is one of the most important design features of a digital euro.^[17]

The public consultation we conducted between October 2020 and January 2021 indicated that protecting privacy is key, so that the digital euro helps to maintain trust in payments in the digital age.^[18] Focus group participants also said they would appreciate options that give them control over their personal data.

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.^[19]

Full anonymity is not a viable option from a public policy perspective. It would raise concerns about the digital euro potentially being used for illicit purposes.^[20] In addition, it would make it virtually impossible to limit the use of the digital euro as a form of investment, but this limitation is essential from a financial stability perspective.^[21]

This means that users would need to identify themselves when they start using the digital euro.^[22] Supervised intermediaries – which are the natural candidates for distributing a digital euro – are best placed to manage this onboarding process.^[23]

Moving beyond onboarding, our analysis suggests that digital euro transaction data should not be visible to the Eurosystem – or any other central entity – beyond what is strictly needed to perform its functions.^[24]

In a baseline scenario, a digital euro would provide people with a level of privacy equal to or higher than that of private digital solutions. Under this set-up, personal and transaction data^[25] would only be accessible to intermediaries to ensure compliance with AML/CFT requirements and relevant provisions under EU law.^[26]

We have also been exploring options to go beyond this baseline and provide greater privacy, should the co-legislators decide in favour of this approach. This could allow the digital euro to replicate some cash-like features and enable greater privacy for lower-value payments, which are usually low risk in terms of money laundering, terrorism financing and violations of relevant EU law.

Consider paying “offline” in digital euro in a shop, with payer and payee in close proximity to each other. This would be very similar to making a cash payment. Should different standards apply for these two payments, even if the risk profiles are similar? Take the example of a chip that can store up to €200 in digital euro – the risk that it is used for money laundering purposes hardly seems higher than for a physical €200 banknote, especially if the chip requires biometric authentication before you can use it.

We are therefore exploring an offline functionality whereby holdings, balances and transaction amounts would not be known to anyone but the user. To contain the risks, these balances and private offline payments would have an upper limit.

In general, a greater degree of privacy could be considered for lower-value online and offline payments. These payments could be subject to simplified AML/CFT checks, while higher-value transactions would remain subject to the standard controls.^[27]

If greater privacy were to be enabled for lower-value payments in digital euro, it should apply to transactions anywhere in the euro area. This would require a harmonised framework for simplified checks, as foreseen in the European Commission’s AML/CFT package from July 2021.^[28]

The Eurosystem High-Level Task Force that I chair is exploring the technical and regulatory aspects, in close cooperation with the European Commission and the European data protection authorities.^[29]

But there are important political choices to be made, which makes our dialogue with you crucial.

Conclusion

Let me conclude.

We are building a broad consensus around the policy objectives for a digital euro through our interactions with stakeholders, political authorities and other major central banks. But just recognising the political need for a digital euro will not by itself guarantee sufficient usage.

Step by step, we are getting a clearer picture of what citizens and merchants want, so we can finetune all the design features of a digital euro before any potential issuance. And co-legislators have a key role to play, for instance to enable greater privacy.

We do not want to be “too successful” and crowd out private payment solutions and financial intermediation. But the digital euro should be “successful enough” and generate sufficient demand by adding value for users.

We already have an idea of the views of the prospective users of a digital euro thanks to our discussions with focus groups. Towards the end of the year we will conduct another round of focus groups, this time giving participants a better idea of the envisaged user experience to gather their feedback.

We will also step up our dialogue with stakeholders in the coming weeks and months, listening to prospective users like consumer groups, small and medium-sized enterprises, retailers and large corporations, as well as to banks and payment service providers. We will also continue to interact with academia and think tanks.

We stand ready to discuss these consultations with you at future hearings. The alignment of European authorities and institutions, mindful of their respective mandates and independence, will be key if a digital euro is to be accepted.

I now look forward to our discussion.