ECB Advances Digital Euro Initiative with Focus on Privacy and Holding Limits Ahead of 2025 Decision

The Digital Euro Initiative is picking up steam. Key discussions about privacy and holding limits are becoming more prominent. The European Central Bank (ECB) is moving forward with its plans for the digital euro and has released its second progress report during this preparation phase.

Topics like holding limits, user privacy, and operational frameworks are now in the spotlight. Important decisions about the Central Bank Digital Currency (CBDC) are expected by late 2025.

To prepare for the possible launch of the digital euro, the Eurosystem started a two-year preparatory phase in November 2023. This phase follows earlier research and design efforts. It’s a crucial step toward modernizing Europe’s payment infrastructure while ensuring the financial system remains stable.

During this phase, the ECB is working on a Digital Euro Rulebook and various operational documents. These resources aim to standardize regulations among member states and provide a clear path for implementation. Seven workstreams are addressing different design and operational challenges, involving national central banks and market participants. The ECB is getting closer to making a formal decision about the future of the CBDC. The next progress report is due in July 2025 and will share more details.

Despite these advancements, several challenges remain. Stakeholders are particularly focused on the debates surrounding holding limits and the complexities of offline functionality.

One of the most contentious issues is how much digital euro individuals and businesses should be allowed to hold. This discussion highlights the tension between systemic stability and usability.

Consumer organizations have pushed for higher holding limits. They argue that convenience and the need to support the unbanked are essential. For example, the consumer advocacy group AGE proposed a cap of €3,200. This amount is roughly the average monthly wage in the EU, with a potential for gradual increases over time.

On the other hand, the European Association of Co-operative Banks (EACB) has suggested a much lower limit of €500 per individual. This number supports the view that the digital euro should primarily serve as a payment method rather than a store of value. Banks worry that high holding limits could destabilize the financial system by drawing deposits away from traditional banks.

As a compromise, the ECB has proposed a “reverse waterfall” system. This means any excess digital euros above the holding limit would automatically transfer back to the linked fiat bank accounts. While this approach reduces the risk of excessive accumulation, consumer groups have criticized it for being overly complicated and potentially harmful to privacy.

Privacy remains a critical aspect of the digital euro's design. The ECB has consistently emphasized that the digital euro would offer a higher level of anonymity compared to current commercial payment methods.

They are exploring cash-like privacy features to allow consumers with strict privacy preferences to transact without excessive data collection. In February 2024, ECB Executive Board member Piero Cipollone reaffirmed this commitment, stating that the digital euro could set a new standard for privacy in digital payments.

These privacy measures aim to address broader concerns about data misuse and surveillance, while also boosting consumer trust. However, achieving this goal requires navigating a complex technological and legal landscape, especially regarding compliance with anti-money laundering and counter-terrorism financing regulations.

A primary goal of the digital euro initiative is to strengthen Europe’s financial sovereignty. The ECB aims to foster competition in the sector and reduce dependence on non-European service providers by developing a robust digital payment infrastructure.

The ECB envisions that payment service providers (PSPs) will be able to expand and innovate their offerings through the digital euro. By integrating the digital euro into existing payment systems, PSPs can tailor new services to meet the needs of European businesses and consumers. This approach leverages local infrastructure and expertise to build a more resilient and efficient financial ecosystem.

To make this vision a reality, the ECB has been engaging with technical service providers and industry stakeholders. In January 2024, they launched a procurement process, offering five work packages worth up to €1.1 billion to assist in establishing the digital euro. These initiatives aim to address critical elements like deploying secure components on mobile devices and integrating at points of sale.

Another key objective is to ensure that everyone in society, especially those without reliable internet access, can use the digital euro. Offline functionality is essential for promoting inclusion, despite its technological challenges.

Research on offline solutions has focused on developing standards for point-of-sale terminals and utilizing security features in mobile devices. This project aims to replicate the convenience and security of cash transactions, making the digital euro a viable alternative for underbanked and unbanked populations.

The ECB remains committed to overcoming these challenges, as shown by its ongoing collaboration with manufacturers and standard-setting organizations, even though specific details are still pending. Achieving offline functionality could significantly enhance the digital euro's usability and appeal.

The legislative framework for the digital euro is still being developed. Although the European Parliament has resumed discussions after the 2024 elections, Stefan Berger's continued role as Rapporteur provides some stability.

The ECB emphasizes the need for cohesive and transparent regulations to facilitate the adoption of the digital euro. This includes addressing issues like holding limits, privacy guidelines, and the division of responsibilities between national central banks and the ECB.

The ECB's strategy continues to prioritize stakeholder engagement and public communication. Efforts to gather input from businesses, consumers, and trade associations have significantly influenced key aspects of the digital euro's design.