The Institute of International Finance (IIF) has circulated a report on the European Commission’s proposed legislation on the digital euro. The group looked at seven different areas where digital euro legislation is lacking and rated the bill.

The IIF is a global financial industry advocacy group headquartered in Washington, DC, with members in 60 countries. The legislative bill for the digital euro introduced in June 2023 was rated with the impact assessment that accompanied it. The published assessment is a follow-up to its comments submitted in June, which aimed to make it a form of payment that is widely accepted and easily accessible.

Overview

The international financial group looked at seven areas and considered six of those areas partly addressed by the proposed legislation. Other aspects were dependent on previous studies, while some cost-benefit analysis was fundamental and high-level. The bill mechanism suggested financial stability and bank intermediation in the holding limits. The IIF mentioned that the limits are yet to be set and how they would be enforced is still unclear. The proposed legislative plan emphasised that allowing individuals to obtain digital euros via their banks upon request ensures easy access and makes sure that users are included.

According to the study, the payment services providers (PSPs) would have limited ability to recover the costs of implementing digital euro services, like connecting to the infrastructure and creating wallet software, while caps are placed on fees. Therefore, liability and economic model challenges were partly addressed. The study noted:

“Privacy controls on digital euro have yet to be defined, and it is not clear what PSPs will need to do in order to meet the requirements or if doing so will even be possible for them at the time of the digital euro’s introduction.”

The study highlighted that Anti-Money Laundering and cybersecurity measures remained to be established.

The IIF emphasised that the legislation did not address governance and conflicts of interest. As the bank supervisor and “issuer, administrator and fee-settler for digital euro,” the European Central Bank (ECB) could find itself in conflicting roles of operator and regulator as there are no independent oversights envisioned for it. The IIF repeated its position on interoperability and said:

“There is little-to-no value in settling for recreating parallel systems that could tie up capital and liquidity, face similar pain points, and be expensive. A CBDC would need to operate on platforms where other digital currencies otherwise operate.”

On June 17 2023, the IIF welcomed the chance to respond to the European Commission questionnaire on a potential euro-dominated central bank digital currency (CBDC). The IIF commended the EC for taking the step to consider the development of the digital euro.

Background of the Legislation

The legislative proposal for the digital euro is being developed in tandem with its infrastructure. In October 2020, the ECB published a report on digital euro. The report was aimed at seeking more comprehensive views on the challenges and benefits of issuing a digital euro and its possible design. The ECB report was followed by the Public consultation on a digital euro on October 20 2020, and ran until January 12 2021. The public consultation included 18 questions which were aimed at collecting the views of citizens and professionals.

In May 2023, the ECB summarised the outcome of its digital euro central bank digital currency prototyping activity. The project was part of the second phase of Eurosystem preparation for a digital euro. The action ran from July 2022 to February 2023. Eurosystem developed a centralised settlement engine exercise that used an unspent transaction output (UTXO) data model. Self-custody wallets were also trialled, and the UTXO model protected user privacy using one-time UTXO addresses that did not disclose the wallets holding them. The ECB announced a Market Research Outcome Report on the digital euro. The report found that offline “solutions compliant with the Eurosystem requirements would be novel and might create uncertainty when an offline solution might be ready.”

Experts at Bitcoin Decode  mentioned that the digital euro is expected to be in the investigative phase until October, and then the ECB can begin testing technical and business solutions. According to respondents, technological solutions are hardware end-user solutions comprising smart cards or a secure element in devices such as smartphones with the best technical option to facilitate cash-like features. Some consider end-user solutions such as software, wallets and apps or cards with dedicated storage or devices as the best way for electronic payments for a digital euro.

The Institute of International Finance has found gaps in the European Commission’s proposed legislation on the digital euro. A live digital euro can only be issued after passing legislation. The Institute of International Finance move shows the group is committed to digital legislation.