Draft digital euro legislation supports permissionless blockchains – Ledger Insights

Today the EU’s Committee on Economic and Monetary Affairs had a meeting during which the digital euro was discussed. An updated draft of the digital euro legislation reveals several key changes. They include support for permissionless blockchains.

The draft legislation states, “Conditional payments in Digital Euros may also be carried out on permissionless distributed ledgers where until now only privately issued assets like crypto-assets or stable coins are available as a means of payment. With the approval and under conditions set by the European Central Bank, the Digital Euro would be made available as a token to be referenced on these chains.”

The central bank and European Council have previously stated they don’t want programmable money at the base layer, so the legislation now specifies conditional payments will be enabled in the “layer above”.

Major changes on holding limits, fees

Banks had a number of objections to the digital euro and most have been addressed. There were concerns about a possible €3,000 holding limit being too high and resulting in a drain on bank deposits. They argued for a €500 limit. The latest draft transfers decision-making responsibility for the holding limits from the European Central Bank to the banks and payment service providers (PSPs) themselves. It suggests they might want to set the limit as the equivalent cash amount clients can withdraw via a debit or credit card, but it doesn’t prescribe it.

On the face of it, this is a big win for the banks. However, this also applies to non-bank payment providers. Given the non-banks aren’t deposit takers, they aren’t worried about losing deposits. So, they could offer very high holding limits, potentially putting banks at a competitive disadvantage.

There are also concessions on fees. A CBDC is not dissimilar to debit and credit cards in that you have merchants and consumers and money has to be moved between them. Hence, there’s a need for inter-PSP charges. The legislation previously prescribed how this might be set: cost plus a reasonable profit margin. Now the inter-PSP fees will be decided by the market. 

Banks were also concerned about potentially not being able to recoup digital euro costs. The legislation acknowledges their need to cover implementation costs.

The ECB wallet is optional

Another concern was that the ECB’s wallet user interface would have to be used rather than their own wallets. The ECB has already stated that is not the case, and the legislation clarifies that the ECB wallet needs to be used only by payment providers that don’t have their own.

In the previous draft legislation, banks were required to provide digital euro services, but it was optional for other payment service providers. Now the requirement also applies to most PSPs.

Meanwhile, European Central Bank (ECB) board member Piero Cipollone provided an update to the Committee.

More to follow.

Ledger Insights will soon publish a report on bank-issued stablecoins and tokenized deposits. Sign up for notification of its release.

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