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ECB releases a report updating its progress on exploring a digital euro

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(Kitco News) - The European Central Bank (ECB) has released a report detailing the investigation phase of the Eurosystem digital euro project which is currently halfway through its two-year investigative phase. The report gave a deeper look into the design and policy issues that are under consideration or have been decided.

Commerce in physical stores and online was highlighted as the biggest use case for a euro central bank digital currency (CBDC) by the ECB, which suggested that a digital euro could harmonize payment solutions and strengthen European strategic autonomy in line with policy goals.

“A digital euro would preserve the role of public money as the anchor of the payments system in the digital age. It would ensure the smooth coexistence, convertibility and complementarity of the various forms that money takes,” the report said. “Moreover, in the future, digital solutions for person-to-person payments could also make this an increasingly relevant market segment for a digital euro.”

Another identified use case for the digital euro would be for payments between governments and individuals, such as paying out public welfare allowances or for use in paying taxes. 

The ECB Governing Council approved the exploration of a digital euro solution in which transactions would be made online and would be validated by a third party as part of the first digital euro release. 

This “covers the broadest set of high-level use cases, is considered to be able to support Eurosystem policy objectives, and leaves room for flexibility in other design decisions related to the digital euro,” the report said. 

Offline peer-to-peer validation solutions will also be explored, but no timeline was provided. Online peer-to-peer solutions will not be studied further in this phase.

On the topic of privacy, the ECB called it “one of the most important design features of a digital euro,” and noted that designing a digital euro that respects the right to privacy is required by law.”

That being said, AML requirements and a desire to limit the digital euro’s use for investments led the ECB to conclude that “Full anonymity is not considered a viable option from a public policy perspective.”

According to the report, the baseline scenario for a CBDC that is compatible with the current regulatory framework means that a “digital euro would provide a level of privacy equal to that of current private sector digital solutions.” This includes the need to provide identity documents when first using the digital euro and the completion of customer checks during the onboarding process by intermediaries. 

Another feature outlined by the ECB includes the ability to restrict large holdings of the digital euro, which includes the creation of a waterfall mechanism that could transfer digital euro holdings above the limit to a commercial bank account. 

Offline holding limits might also be imposed, and a “wide set of tools” will be incorporated into the design to respond to future financial conditions.

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Moving forward, the investigation intends to explore different design and distribution options that can meet the needs of end users. This includes an “analysis of how financial intermediaries could provide front-end services that build on a digital euro, how digital euro would be distributed to users and how payments would be settled.”

“Overall, the next design decisions will have to be made on the settlement model, the distribution model, the role of intermediaries, and funding / defunding,” the report said. 

The decision on whether to move on to the next phase, which would involve testing “appropriate technical solutions and business arrangements necessary to provide a digital euro,” will be made by the Governing Council in autumn 2023. That phase could last up to three years.

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