The Institute of International Finance (IIF) recently evaluated the European Commission’s proposed legislation on the digital euro, providing an assessment of its strengths and weaknesses. The IIF is a globally recognized advocacy group in the financial industry with members across 60 countries. In their evaluation, the IIF considered various areas of the proposed legislation and highlighted areas where it was only partly addressed.
According to the IIF, six out of seven areas examined in the legislation were considered to be “partly addressed.” One of the areas that raised concerns was the mechanism suggested for financial stability and bank intermediation, which involved holding limits. However, these limits have not been set, and it remains uncertain how they would be enforced.
The IIF also noted challenges related to the economic and liability models associated with the digital euro. Payment service providers (PSPs) would have limited ability to recover the costs of implementing digital euro services, such as connecting to the infrastructure and creating wallet software. Additionally, caps would be placed on fees, and credit institutions would be required to provide basic digital euro services for free. These factors pose economic challenges that were only partly addressed by the proposed legislation.
Another area of concern highlighted by the IIF is privacy controls. The study indicated that the privacy controls for the digital euro have yet to be defined. It remains uncertain what measures PSPs will need to take to comply with the requirements or whether it will even be feasible for them to do so when the digital euro is introduced. Additionally, the establishment of anti-money laundering and cybersecurity measures is still pending.
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Governance and conflicts of interest were also among the areas that the IIF deemed not to be sufficiently addressed in the proposed legislation. The IIF expressed concerns regarding the European Central Bank (ECB) acting as both the bank supervisor and the “issuer, administrator, and fee-setter for a digital euro.” This dual role could potentially lead to conflicts of interest, and the IIF emphasized the need for independent oversight.
Regarding interoperability, the IIF reiterated its position that creating parallel systems for the digital euro would be costly and inefficient. Instead, the IIF suggested that the digital euro should operate on existing platforms where other digital currencies are already in use. This approach would leverage the infrastructure and networks already established for digital currencies, avoiding unnecessary duplication.
It is worth noting that the legislative proposal for the digital euro is being developed alongside its infrastructure. Currently, the digital euro is in the investigative phase, which is set to continue until October. Afterward, the ECB may decide to test technical and business solutions. However, the issuance of a live digital euro can only occur once the legislation has been passed.
In conclusion, the IIF’s assessment of the European Commission’s proposed legislation on the digital euro indicates that while certain areas were partly addressed, there are still important considerations and challenges that need to be resolved. The IIF emphasized the need for clarity regarding financial stability mechanisms, economic and liability models, privacy controls, governance, and conflicts of interest. Additionally, the IIF recommended leveraging existing platforms for interoperability rather than creating parallel systems.
