On Monday, the European Central Bank (ECB) published the third progress report on the digital euro, outlining some design and distribution options for the central bank digital currency (CBDC). Initially, the digital euro would only be accessible to euro area residents as well as non-resident citizens with a euro area bank account or payment app. Intermediaries will include banks, emoney providers and payment providers. And additional services, such as conditional payments, could be offered by payment service providers (PSPs).
Access: residents and non-residents
The digital euro would only be available to euro area residents, merchants, and governments in its initial release. Non-resident euro area citizens could also gain access, provided they have an existing relationship with a euro area bank or payments firm. But consumers in the wider European Economic Area (EEA) and selected third countries might only gain access as part of subsequent releases.
Certain limits would apply to control the amount of digital euro in circulation, including restrictions on multiple accounts via a single account identifier, irrespective of the payment provider.
Digital euro distribution model
As for distribution, the ECB builds on its second status report, published in December 2022, to devise an intermediated CBDC model. The digital euro scheme would be based on the Payment Services Directive (PSD2) and only allow selected PSPs to offer digital euro payment services, accounts, and applications. Hence, solely credit institutions, e-money institutions, and payment institutions could distribute the digital euro.
In terms of the delivery approach, the ECB envisages end-user access either through existing PSP banking apps or through an app provided by the Eurosystem. The rationale is to offer a “harmonized entry point for basic payment functionalities provided by PSPs” and facilitate the speedier adoption of new and smaller intermediaries.
QR codes, NFC (contactless), and online payments are contemplated to ensure a standardized technical interaction between parties.
Digital euro functionality
The report distinguishes between core, optional, and value-added services for the digital euro. Basic functions – those that all supervised entities would be required to provide – include opening, onboarding, and funding, among others. On top of these, PSPs could offer optional services “to enhance the core product and improve users’ experience”. Some examples are access to a digital euro account held by another intermediary, recurring payments, and pay-per-used pre-authorization.
Lastly, value-added services would be “left fully to the market.” These include conditional payments, which are effectively programmable money, but the ECB avoids that terminology because the base layer of the digital euro will not carry any restrictions.
The market will entirely drive conditional payments. If they request it, there will be help in developing common standards. Additionally, the backend layer of the digital euro could have functionality to reserve funds for conditional payments.
While the initial use cases are domestic, it is planning for cross border use for p2p payments and ecommerce. This will likely involve directly connecting with other CBDCs (perhaps like Project Icebreaker) or shared infrastructure.
Next steps
Later this year, the ECB will propose a final digital euro design comprising all the elements presented in the three progress reports. Parallel research will continue, particularly on developing a digital euro scheme rulebook, and stakeholder engagements still lie ahead. One of the trickiest questions is compensation for payment providers.
After a final review in autumn 2023, the Governing Council will decide whether to move to the next implementation phase, which is separate from a decision to launch.
