(Kitco News) - The European Central Bank (ECB) has released the latest progress report on its investigation into a retail central bank digital currency (CBDC), outlining how credit institutions and payment service providers will become supervised intermediaries responsible for all end user-facing roles in the digital euro ecosystem.
According to the report, supervised intermediaries “would be the direct counterparts for individuals, merchants and businesses using the digital euro and would perform the user and transaction management tasks involved.”
Their responsibilities will include offering a variety of user-facing services including opening accounts or wallets, completing KYC/AML checks, providing payment instruments, and client onboarding and offboarding. They are also tasked with providing devices or interfaces to pay with digital euros in physical stores, online or person-to-person.
For its part, the Eurosystem – which is comprised of the European Central Bank and the national central banks of the Member States whose currency is the euro – would be responsible for the onboarding and management of the supervised intermediaries as well as for the settlement of digital euro transactions.
“Holding a digital euro would amount to a direct claim against the central bank – as is the case with banknotes today,” the ECB said. “This means that the digital euro would be a liability on the balance sheet of the Eurosystem. The Eurosystem must therefore retain full control over digital euro issuance and settlement. The best way to achieve this would be to have the Eurosystem perform the settlement activities for the supervised intermediaries that are to distribute the digital euro to end users.”
The ECB made sure to stress the fact that the digital euro is being designed in a way that minimizes the Eurosystem’s involvement in processing user data. This means that the Eurosystem will not be able to determine how many digital euros any individual end user holds, and it will not be able to make any inferences about their payment patterns.
At this point in the investigation, the Eurosystem has not yet decided on which technology would best suit the digital euro. Systems being explored include traditional technology, distributed ledger technology, and a combination of both for settlement activities. Factors being considered in the decision include efficiency, security, environmental impact and integration with customer-facing services.
The ECB’s investigation began in Oct. 2021 and is set to conclude in Oct. 2023, at which point EU leaders will decide whether to issue a digital euro. During the remaining time, the ECB will continue to assess a number of design and distribution options for a digital euro, “including advanced functionalities for digital euro payments (programmable payments, cross-currency payments), and additional aspects of the digital euro distribution model,” the report said.
The distribution model includes “matters relating to supervised intermediaries and scheme access criteria, form factor and how end users could access the digital euro customer interface, core services and value-added services, end user onboarding, digital euro access and holdings, and issuance and redemption.”
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The ECB is also set to finalize a prototyping exercise that is testing "how well potential back-end solutions developed by the Eurosystem could be integrated with front-end prototypes." The exercise is expected to be completed in the first quarter of 2023, at which point the findings will be published.
The high-level design of the finalized digital euro will be presented for approval by the ECB’s decision-making bodies in the second half of 2023. At that point, the Governing Council will review the outcome of the investigation phase and decide whether or not to move to a realization phase “in which the appropriate technical solutions and business arrangements necessary to provide a digital euro would be developed and tested.”
“A decision on the possible issuance of a digital euro would not come until a later stage and would also depend on legislative developments in terms of a regulation to establish and govern essential aspects of the digital euro to be adopted by the European Parliament and the Council of the EU, on a proposal by the European Commission,” the report concluded.
