The European Central Bank publishes its first progress report on the preparation phase for the digital euro

• The ECB is designing high privacy standards for online and offline digital payments as close to cash transactions as possible
• The European Central Bank has begun work on designing a methodology to calibrate holding limits for the digital euro
• The ECB continues to provide technical input to legislative discussions with European lawmakers

The European Central Bank (ECB) today published its first progress report on the preparation phase for the digital euro, which was launched on 1 November 2023 with the aim of laying the foundations for the potential issuance of a digital euro.

The report outlines progress on key aspects of the design of a digital euro and the next steps envisaged for the project.

Privacy of the digital euro

The design of the digital euro includes an offline function that will provide users with a cash-like level of privacy for payments in physical stores and between individuals. When paying offline, personal transaction details will be known only to the payer and payee and will not be shared with payment service providers, the Eurosystem or any supporting service providers.

In recent months, the European Central Bank approved the technical features required to ensure that online digital euro transactions will provide higher privacy standards than current digital payment solutions, while still ensuring strong end-user protection against fraud. The European system will use state-of-the-art measures, including pseudonymization, hashing and data encryption, to ensure it cannot link digital euro transactions directly to specific users.

In line with current practice, payment service providers will only have access to personal data required to ensure compliance with EU law, such as anti-money laundering regulations. To use data for commercial purposes, payment service providers will need explicit consent from users. As the issuer and payment infrastructure provider for the digital euro, the ECB will be supervised by independent data protection authorities who will monitor its compliance with the European Union Data Protection Regulation (EUDPR) and the General Data Protection Regulation (GDPR).

Digital euro offline

Eurosystem is developing an offline function that will enable Digital Euro users to pay offline after pre-funding their Digital Euro account online or at an ATM. Payments will be made directly between devices that are not connected to the Internet – eg. Mobile phones or payment cards – owned by the users involved in the transaction, without having to rely on third parties.

The ECB is investigating technical tools already available on the market that could allow offline digital euro transactions to be settled directly in end-user devices. It also evaluated other key aspects of offline euro digital payments, with the aim of making them seamless, secure and easy to use.

The ECB’s technical work has focused in particular on delivery considerations and how to fund and defund offline digital euro wallets, including how to conduct anti-money laundering and counterfeiting checks. For offline payments, users will be able to use their mobile devices, while the European system is also investigating the potential use of battery-powered smart cards or unpowered smart cards that use a bridge device for communication.

The effective implementation of the offline digital euro on mobile devices will ultimately depend on the requirements set out for equipment manufacturers and electronic communications service providers in the Digital Euro Regulation.

Limits on holding digital euros

The design of the digital euro must ensure that it can be widely used as a means of payment while maintaining financial stability and monetary policy transmission. For this reason, individuals’ digital holdings will not be redeemed from Euros and will be subject to retention restrictions. Furthermore, users will have the option to link their EUR digital wallet to a business bank account, allowing them to make payments through their EUR digital wallet without having to pre-load it with funds.

The European Central Bank has begun work on a calibration methodology to determine retention limits, which entails a comprehensive monetary and economic assessment.

A newly established workstream, involving experts from national central banks in the European system and competent national authorities, has begun to identify factors that can influence the calibration of retention limits. In this context, the ECB launched a dialogue and data collection process to obtain the precise data required to conduct the assessment. Since this is a collective endeavour, the ECB holds regular exchanges with co-legislators and market participants (consumers, traders and financial institutions) to update them on the technical work and collect feedback. The first engagements have already taken place, and more will follow in the coming months given the importance of this work for all stakeholders involved in the digital euro project.

The results of this initial evaluation will feed into the design of the calibration methodology. The exact holding limits are based on this methodology and are determined closer to the time of issuance, taking prevailing economic conditions into account.

Digital Euro rules and tender process

The Digital Euro Rulebook Development Group has completed an interim review of the first draft of the rulebook, which sets out rules and procedures for the standardization of digital euro payments across the euro area. The group is expected to present an updated version of the digital euro rulebook by the end of 2024, including pending chapters, which focus on user identification and authentication as well as infrastructure-related requirements.

In parallel, the ECB issued five calls for applications aimed at establishing framework agreements with appropriate external service providers to provide components of the digital euro and related services. The Eurosystem will now proceed with the selection process by inviting the highest-ranking respondents to submit bids. This process will help determine the final technical details of the digital euro design.

Supporting the legislative process

As legislative deliberations developed, the ECB continued to provide technical expertise to the relevant European institutions. In particular, to support the ongoing discussions, the ECB has: (a) provided technical inputs regarding the analysis of the dynamics in the euro retail payments market; (2) publish an in-depth technical analysis of the feasibility and implications of allowing multiple digital euro accounts per user and (3) conduct additional technical work on the digital euro application with the aim of making it highly comprehensive and accessible.

“The preparation phase for a digital euro is progressing well and we support the ongoing democratic debate on the legal framework for a digital euro,” said Executive Board Member Piero Cipollone, who chairs the High-Level Task Force on a Digital Euro. “The digital euro is a joint European endeavour. As such, we will continue to work with all stakeholders, including the European public, to ensure its success and benefits us all.

The Governing Council of the ECB will take a decision on the potential issuance of a digital euro only after the adoption of the relevant legislation, since this legal framework is essential for the concrete function of the digital euro.

For media inquiries, please contact Georgina Garriga Sanchez, Tel: +49 152 2255 2184.

A “bridge device” is a simple, pocket-sized, battery-powered device that creates a communication channel between two unpowered smart cards, allowing transactions to occur between them. At a minimum, this device must have: i) a user interface (such as a display and keyboard), ii) communication capabilities, ii) a card reader and near-field communication capabilities, and iv) a small battery.

Proposal for a regulation of the European Parliament and of the Council on the establishment of a digital euro, COM(2023) 369 final, 28 June 2023.

Business users, such as merchants, will have a zero holding limit, meaning they will not be able to pool their holdings of digital euros, but they will be able to make certain types of payments.

For example, the assessment includes an analysis of the potential impact of the digitization of payments on demand for banknotes, as banknotes and a digital euro will have indistinguishable effects on banks’ liquidity.