In a report on the European Commission’s proposed law for the digital euro, the Institute of International Finance (IIF) gave it an average grade. The digital euro law introduced in June and the related impact assessment were rated by the IIF, a global financial industry lobbying group with members in 60 countries and headquarters in Washington, D.C. The evaluation is a response to feedback the IIF provided in June.
Six of the seven topics the IIF looked at were “partially addressed” by the proposed legislation, according to the IIF. Aspects of the cost-benefit analysis that were regarded to be “basic and high-level” were left out or were dependent on earlier research. Holding restrictions, which have not yet been established and are not clear how they would be enforced, are the mechanism provided for financial stability and bank intermediation in the bill.
While limitations on fees are in place, payment service providers (PSPs) would only have a limited opportunity to recoup the expenses of implementing digital euro services, such as connecting to the infrastructure and developing wallet software. Credit companies would have to offer free basic digital euro services. As a result, the investigation discovered that “economic and liability model challenges” had only been partially addressed. The privacy rules for the digital euro have not yet been specified, and it is unclear what PSPs will have to do to comply with the regulations or even if they will be able to do so at the time the digital euro is introduced. Additionally, cybersecurity and anti-money-laundering policies need to be implemented.
The IIF said that the legislation did not address governance and conflicts of interest. The European Central Bank (ECB), which oversees banks and serves as “issuer, administrator, and fee-setter for a digital euro,” may be forced to choose between its dual duties of regulator and operator. It will not have any independent oversight. The IIF reiterated its stance on interoperability, claiming that there is little to no value in opting for the creation of parallel systems that can squander resources and cash flow, experience the same problems, and be costly. A CBDC would have to function on systems where existing digital currencies now do. The infrastructure for the digital euro is being constructed along with the legislative plan.
Through October, the investigation phase for the digital euro is anticipated. A live digital euro can only be issued if the law is passed, following which the ECB may decide to start testing technological and commercial options.