Blockchain for Banking Legal and IP News

Institute of International Finance questions digital euro business model

digital euro currency cbdc

On Monday, the Institute of International Finance (IIF) published a staff assessment note on the draft digital euro legislation. It’s concerned about the impact of the central bank digital currency (CBDC) on banks, including the costs and competition. It also notes the central bank has a conflict of interest.

One general IIF observation is it believes that digital currencies and tokenized assets will exist in a multi-asset system and is concerned that a CBDC could be yet another silo. “To achieve the objectives of EU authorities, a CBDC would need to operate on platforms where other digital currencies otherwise operate,” the authors wrote.

The digital euro legislation included an impact assessment to quantify the costs, benefits and risks. While holding limits of around €3,000 have been discussed, the draft law leaves the figure up to the European Central Bank (ECB). However, they will need parliamentary input for changes. The IIF critiques the impact assessment of CBDC holding limits as “somewhat basic”. And it questioned how much it involved private sector input.

Payment service providers (PSPs) such as banks will incur significant costs. This includes connecting to and maintaining integration with the CBDC ledger and developing end user wallets. Plus, there are significant costs for compliance. The draft law requires banks, but not all PsPs, to provide free services to end users. On the revenue side, there will be limits on transaction fees and charges. While the IIF didn’t put it quite so bluntly, this is co-opting private institutions into public service. 

Additionally, the IIF notes the draft law has no restrictions on the ECB subsidizing the digital euro infrastructure potentially “crowding out private sector means of payment.” We’d observe that’s a tricky one, as one of the stated aims of the digital euro is to reduce dependence on payment systems developed outside of the EU. For example, Visa and Mastercard.

CBDC and central bank conflicts of interest

From the start, it’s been clear that CBDCs present a conflict for central banks. However, that’s something central banks rarely, if ever, address.

Fortunately, the IIF is raising the issue. One conflict is the ECB sets the fees for the digital euro and is the promoter. At the same time, it is meant to manage disintermediation risks.

In our view, the bigger issue mentioned by the IIF is the conflict between competing with private sector entities and regulating them. Plus there’s no independent oversight of the ECB’s role in the digital euro.

In advance of the digital euro legislation, multiple EU parliamentary papers explored the benefits and risks of a digital euro. The IIF paper complements these. 

Image Copyright: 3dart / 123rf