By The European Central Bank (ECB) has published its second progress report on the development phase of the digital euro, shedding light on advancements in its Rulebook, design research, outsourcing initiatives, and key features like holding limits. This report comes as part of the Eurosystem’s two-year preparatory phase, which began in November 2023. The ECB’s Governing Council is expected to decide on the launch of the central bank digital currency (CBDC) by late 2025, pending regulatory approval.
Debating Digital Euro Holding Limits
One of the most contentious topics discussed in the report is the establishment of holding limits for the digital euro. These limits aim to ensure that the digital euro functions primarily as a payment tool rather than a store of value, addressing concerns about potential impacts on financial stability and bank deposits.
The “Waterfall” Functionality
A central feature of this debate is the proposed “waterfall and reverse waterfall” mechanism, which automatically transfers excess digital euro holdings into linked bank accounts if balances exceed specified limits. While intended to balance usability with financial stability, the feature has drawn mixed reactions:
- Consumer groups advocate for higher holding limits, citing usability, convenience, and support for the unbanked. For example, AGE, a consumer organization, suggested a limit of €3,200, aligning with the average EU monthly salary, with provisions to raise this cap over time.
- Banking groups prefer lower limits, emphasizing that the digital euro should remain a payment instrument. The European Association of Co-operative Banks (EACB) has proposed a €500 limit for individuals, aligning with earlier recommendations from the banking sector. They also suggest enshrining the limit in legislation to prevent frequent changes.
Critics, particularly consumer bodies, have expressed reservations about the waterfall mechanism, citing concerns over complexity, reduced privacy, and its potential impact on usability. Additionally, some EU member states have challenged the ECB’s authority to unilaterally set these limits, underscoring the need for broader consensus.
Broader Progress Updates
- Rulebook Development
The Digital Euro Rulebook will serve as the operational framework for the CBDC. Key focus areas include user journeys, business rules, and end-to-end payment flows, which have garnered significant feedback from stakeholders. - Tender and Outsourcing Initiatives
The ECB has launched a tender process worth €1.1 billion to outsource five significant components of the digital euro infrastructure. National central banks are also participating by submitting offers for internal components. - Offline Functionality and Integration
Work on enabling offline transactions continues, with progress in secure element technology for mobile devices and engagement with manufacturers. The ECB is also identifying reusable standards for point-of-sale terminals to streamline integration with existing systems. - User-Centric Design
Research into user design preferences remains ongoing, ensuring that the digital euro meets the needs of a diverse user base. Recent industry consultations have also explored conditional payments and branding innovations.
Legislative Context
The legislative process for the digital euro faced delays due to the 2024 EU elections but has now resumed under the coordination of Stefan Berger, the Rapporteur who previously led these efforts. His continuity in this role is expected to accelerate legislative discussions.
Looking Ahead
The ECB’s progress report underscores the complexity of designing a digital euro that balances innovation, financial stability, and usability. While significant advancements have been made, particularly in operational frameworks and user research, the debate over holding limits remains a pivotal issue. Feedback from stakeholders and further legislative developments will play a critical role in shaping the future of Europe’s digital currency.
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