An overview of progress towards a potential central bank digital currency (CBDC) for the 20-member eurozone has been published this week by the European Central Bank (ECB).
The ECB entered a ‘preparation phase’ for a potential digital euro on 1 November 2023 that will initially run for two years. The first progress report on the digital euro preparation phase summarises what has happened since, as well as planned next steps.
A decision on whether to actually issue a digital euro will be taken at a later stage, but not before a legal framework is in place and ‘all functional features’ have been specified.
ECB executive board member Piero Cipollone, who chairs the high-level task force on a digital euro, said in a press release accompanying the 15-page report that the preparation phase was “progressing well” and that it “support[s] the ongoing democratic debate on the legal framework”.
“The digital euro is a common European endeavour. As such, we will continue engaging with all stakeholders, including the European public, to ensure that it is successful and benefits us all,” said Cipollone, who replaced fellow Italian Fabio Panetta on the executive board (and chairing the taskforce) as the preparation phase got underway. Panetta is now governor of the Banca d’Italia, where Cipollone was previously deputy governor.
RELATED ARTICLE European Central Bank gives nod to digital euro ‘preparation phase’ – a news story (18 October 2023) on the Governing Council’s thumbs-up to move to the next stage of the ECB’s journey towards a potential eurozone CBDC
Pseudonymisation, hashing and data encryption
The report (pubished on 24 June) allocates its first two main sections, respectively, to the topics of privacy and offline functionality: two of the biggest challenges facing CBDC designers worldwide (and which also intermesh).
The digital euro’s design includes an offline functionality that would offer users a ‘cash-like’ privacy level for payments in physical shops and between individuals, the report explains. ‘When paying offline, personal transaction details would only be known to the payer and the payee and would not be shared with payment service providers, the Eurosystem or any providers of supporting services,’ it states.
‘In recent months, the ECB has agreed on the technical features required to guarantee that online digital euro transactions will provide an even higher privacy standards than current digital payment solutions, while still ensuring robust end-user protection against fraud,’ the report continues.
It adds that the Eurosystem would use ‘state-of-the-art measures, including pseudonymisation, hashing and data encryption, to ensure it would not be able to directly link digital euro transactions to specific users’. ‘Pseudonymisation’ is a process used to protect personal data by removing identity attributes and replacing them with fictitious ones. ‘Hashing’ is a process used to convert data into a fixed-size string of characters, typically a sequence of letters and numbers.
Payment service providers would, it states, only have access to the personal data that are required to ensure compliance with European Union (EU) law, such as anti-money laundering (AML) regulations. To use data for commercial purposes, payment service providers would need users’ explicit consent. The ECB will also, the report points out, be supervised by independent data protection authorities that will monitor its compliance with the EU data protection regulation (EUDPR) and general data protection regulation (GDPR).
RELATED ARTICLE Banks ‘barking up wrong tree’ over digital euro deposit flight fears: ECB blogpost – a news article (23 February 2024) on a blogpost co-authored by the ECB’s Piero Cipollone, Market Infrastructure & Payments (MIP) director-general Ulrich Bindseil and MIP adviser Jürgen Schaaf
Bridge devices
The offline payments section reports that the Eurosystem is developing an offline functionality that would enable digital euro users to pay without an internet connection after pre-funding their digital euro account via the internet or an ATM. Payments would take place directly between the offline devices – for example, mobile-phones or payment cards – belonging to the users involved in the transaction, without having to rely on third parties.
The Frankfurt-headquartered ECB has been investigating ‘technical tools already available on the market’ that could allow the settlement of offline digital euro…
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