IIF Examines Digital Euro, Highlights 7 Key Areas of Concern

The Institute of International Finance (IIF), a globally recognized financial advocacy group based in Washington, D.C., recently reviewed the European Commission’s draft on the digital euro. This review comes as a continuation of the comments they submitted earlier in June.

Going deep into the proposed legislation, the IIF evaluated seven crucial components:

• Cost-benefit analysis: Some sections of the legislation seemed generic, with a few leaning on prior studies or completely missing.
• Financial stability mechanism: The proposal hints at setting up holding limits. However, the exact thresholds remain undefined, and enforcement methods remain ambiguous, as per the IIF.
• Payment services providers (PSPs) limitations: The proposed rule might limit PSPs’ recovery costs linked to the integration of digital euro services. This includes interfacing with the new system and developing wallet software. Moreover, the draft mandates credit institutions to deliver essential digital euro services without any charges.
• Privacy controls: The draft lacks clarity regarding the precise privacy controls for the digital euro. There’s uncertainty over the PSPs’ compliance requirements and whether they could achieve these stipulations once the digital euro rolls out.
• Security: The specifics about Anti-Money Laundering and cybersecurity protocols are still under wraps.
• Governance issues: The IIF points out a potential conflict of interest as the European Central Bank (ECB) juggles its roles. Without any separate oversight, the ECB would act as both a regulator and an operator.
• Interoperability: The IIF re-emphasized their stance on this matter, stating, “There is little-to-no value in settling for recreating parallel systems that could tie up capital and liquidity, face similar pain points, and be expensive. […] A CBDC would need to operate on platforms where other digital currencies otherwise operate.”

Currently, the digital euro’s groundwork runs side by side with the legislative process. The European Commission plans to explore the digital euro further until October. Subsequent to this, the ECB might consider experimenting with technical and business strategies. But, the digital euro can only come to life after the law’s enactment.