The European Central Bank’s Blockchain Initiative
The European Central Bank (ECB) is preparing to implement blockchain-based settlements in central bank money as early as next year while finalizing plans for a digital euro. However, the specifics around privacy measures for this digital currency will require approval from legislators within the European Union. Piero Cipollone, a member of the ECB’s executive board, announced this development in a statement released on Friday, highlighting the bank’s commitment to facilitating transactions using Distributed Ledger Technology (DLT).
Infrastructure and Functionality of the Digital Euro
The ECB is also focused on ensuring that the infrastructure for the digital euro is adaptable for cross-border payments, which would allow its system to interact internationally. Additionally, this underlying framework would be accessible for other entities to use in transactions involving various central bank digital currencies (CBDCs). To maintain the traditional functions of banks, Cipollone mentioned that the digital euro will impose limits on holdings and will not pay interest on these balances, thereby safeguarding banks’ roles in credit intermediation and monetary policy transmission.
Pending the required legislative green light by 2026, the ECB projects that initial trading with the digital euro could commence in 2027, with the full launch of the CBDC anticipated by 2029. ECB President Christine Lagarde previously stated that the responsibility for shaping the design of the digital euro, especially concerning its privacy features, falls to EU lawmakers.
Challenges and Concerns
Cipollone emphasized the necessity of a CBDC amidst the EU’s disjointed retail payment sector and the challenges associated with slow cross-border transactions. He outlined concerns that failing to introduce a CBDC could exacerbate fragmentation and elevate credit risks stemming from increased use of tokenization and DLT. The planned tokenized version of the digital euro aims to alleviate these issues, particularly within the digital asset market.
While acknowledging that stablecoins might enhance cross-border payment speed and affordability, Cipollone also raised alarms about the potential destabilization risks they pose to currencies and financial systems. He cautioned that the proliferation of dollar-based stablecoins could undermine the euro’s status in global finance.
Privacy and Data Protection Measures
In its 2023 assessment, the ECB has stated that the digital euro would not include restrictive programmability but would permit conditional payments. Furthermore, for its offline model, the proposed privacy and data protection levels would be comparable to those associated with cash transactions. This offline capacity would enable device-to-device payments unmediated by a third party, thus adhering to proportionality and necessity standards in data protection. Payments made with the digital euro in an offline context would be locally stored, reminiscent of sci-fi credits. The ECB is discussing utilizing secure mobile device elements and smart cards as parts of this offline model.
Regulatory Landscape and Future Considerations
Nevertheless, these recommendations present a sharp contrast to recent privacy invasions proposed by the EU, as lawmakers are expected to review the CBDC framework. Notably, the European Commission’s earlier attempt to enforce private message scanning faced considerable pushback last month. An internal document released earlier this month reflects a favor from member states toward extensive data retention practices, asserting that companies should track communication metadata, including timestamps and locations.
Moreover, the EU’s Anti-Money Laundering Handbook, published in May, introduced a ban set to commence in 2027 on cryptocurrency accounts that allow transaction anonymization and those employing anonymity-enhancing currencies, following earlier concerns raised by the EU Innovation Hub regarding privacy-preserving technologies in June 2024.
