The European Central Bank (ECB) has recently published its third progress report regarding the development of the digital euro, which is intended to serve as a retail central bank digital currency (CBDC). Currently, the digital euro is in its preparation phase, scheduled to last until the end of October. At the conclusion of this period, a decision will be made on whether to proceed with its launch, contingent upon the passage of necessary supporting legislation.
This report highlights several important features of the ongoing efforts surrounding the digital euro, including updates on the digital euro rulebook, exploratory initiatives with market participants focusing on innovative applications, and continued engagement with relevant stakeholders.
Exploring the Offline Digital Euro
One intriguing aspect of the report is the ECB’s exploration of an offline digital euro. This area presents significant technical challenges, particularly in ensuring payment security and preventing double spending when offline—meaning without access to payment systems. Offline payments could be crucial in regions with unreliable internet connectivity, and they may become essential during emergencies when digital currencies may be the only available payment method due to reduced cash usage.
As such, the ECB is assessing ways to enable payments to function effectively even when payment systems are offline. This poses difficulties since most offline systems typically allow only limited transactions (commonly referred to as “hops”). For example, if a customer pays a vendor by tapping their phone, that same payment can potentially be re-used for another transaction, but subsequent transactions would ordinarily require a re-connection to the payment infrastructure.
Moreover, the central bank is working on solutions that allow for topping up digital wallets during these offline scenarios. Other jurisdictions have conducted small-scale experiments by designating trusted parties to facilitate fund distributions. One potential scenario could be a bank branch leveraging Bluetooth technology to transfer funds to customers using a handheld device, where customers present a bank card along with a matching identification document.
It’s notable that more than half of the ECB’s outsourcing costs is dedicated to developing the framework for an offline digital euro. This year, the central bank plans to select vendors for five essential components of this development. Risk management, as well as digital euro application development, represent the second and third largest components of the €1.1 billion budget allocated for this initiative.
Budgets and Legislative Considerations
The topic of budgets is equally critical in this dialogue. A recent PwC research, commissioned by various European banking bodies including the European Banking Federation, estimates that implementation costs for banks in adopting the digital euro could soar to €18 billion. This figure does not account for offline and point-of-sale integration functionalities. The report elucidated significant concerns regarding the financial and operational feasibility of the digital euro for retail banks operating within the eurozone.
The ABI, the Italian banking federation, although supportive of the digital euro, has previously projected implementation costs of approximately €880 million for its member banks alone. Additionally, there are concerns regarding the specific design of payment systems, which significantly differ from the current SEPA instant payment framework and could entail considerable technical adaptations to implement effectively.
These financial implications were emphasized during recent discussions held with President Christine Lagarde in the European Parliament. Conversely, the ECB has successfully cultivated a strong sense of urgency with the European Council—comprised of member state representatives—especially in light of increased support from the Trump administration for stablecoins predominantly denominated in U.S. dollars. This situation raises concerns related to monetary sovereignty within Europe. Previous discussions have indicated that Europe’s MiCA regulations could implement reasonable safeguards to limit the mainstream use of foreign-denominated stablecoins for everyday transactions.
As the preparation phase draws to a close at the end of October, the pressing question remains: will the Parliament pass the necessary legislation in a timely manner to pave the way for the digital euro?
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