The euro goes digital – introducing the Single Currency Package and what to expect

RegCORE Client Alert | EU Digital Single Market

QuickTake

On 28 June 2023, the European Commission (the Commission) published two legislative proposals of what is being termed the ‘Single Currency Package’ (SCP).Available hereShow Footnote These proposals ensure that citizens and businesses can continue to access and pay in euro banknotes and coins across the euro area, make and receive payments online such as by transfers as well as to set out a legislative framework for a possible ‘digital euro’, the euro area’s central bank digital currency (CBDC) which the European Central Bank (ECB) may issue in the future as a complement to existing forms of payments in euros.

The SCP comes almost two years after the ECB launched its digital euro project, on 14 July 2021. The SCP measures aim to be mutually supportive so as to ensure both payment options can co-exist. This means (i) the new possibility to make payments in central bank money i.e., through the CBDC colloquially termed the “digital euro”; and (ii) the continued ability to make cash and online payments. The SCP achieves that aim, in that the first proposal for an EU Regulation focuses on the digital euro’s CBDC attributes for use by retail clients. It is also quite possible that the ECB may further explore CBDC use cases for non-retail client use. The second proposal for an EU Regulation clarifies and uniformly establishes what constitutes legal tender of euro banknotes and coins by focusing on (1) acceptance of cash and (2) access to cash. This thereby collectively aims to safeguard the continued and widespread acceptance of cash throughout the euro area.

The SCP does not affect any of the other currencies that are legal tender in the EU. Nor does it impact other non-EU but European jurisdictions that use the euro as de facto legal tender. People, businesses and public entities outside the euro area may, provided they are eligible, still access the digital euro by opening digital euro accounts with payment service providers (PSPs) established or operating in an EEA country or a third country provided the latter has concluded arrangements (i.e., monetary agreements) with the ECB and the applicable central bank.

While the SCP is a long-awaited step forward, rulemaking does not stop there. The EU’s co-legislators and the ECB will continue to consider the extent of use cases of a digital euro and how that might also serve to increase the EU’s financial sovereignty, resilience and competitiveness. Accordingly, a set of issues, including holding limits and remuneration will likely persist as a point of friction throughout the legislative process on the CBDC elements of the SCP along with more general proposals in the pipeline. Over the last two years, the ECB has been engineering and communicating key design features of and investigating potential distribution arrangements for a digital euro, as published in a set of progress reports.dated September 2022, December 2022 and April 2023, available hereShow Footnote

Effective access for citizens and businesses to a digital euro including the settlement of payments in digital euro in the current financial system, contrary to banknotes, requires an elaborate underlying infrastructure, the establishment of which (might) exceed the competences of the ECB alone.See Article 133 TFEU, hereShow Footnote The Frankfurt-based institution has reiterated throughout its digital euro project that the distribution – access for end users - of the digital euro would happen via supervised intermediaries, that is payment services providers and credit institutions providing payment services.Compare also Article 13(6) sentence 2 Proposal for a Regulation of the European Parliament and of the Council on the establishment of the digital euro “Digital euro users shall not have any contractual relationship with the European Central Bank or the national central banks”; and Recital (26) of the proposed text on a digital euro, available here, with the ECB’s “Third report on Progress on the investigation phase of a digital euro: A digital euro scheme would establish a common set of rules, standards and procedures that supervised intermediaries would have to adhere to in order to distribute the digital euro.”Show Footnote

In the view of the ECB, to achieve a homogeneous user-experience across the euro area, the necessary infrastructure would have to “establish a common set of rules, standards and procedures that supervised intermediaries would have to adhere to in order to distribute the digital euro”.Available hereShow Footnote The proposed text now published sets out, inter alia, that while all PSPs may distribute the digital euro, however only credit institutions operating accounts would be required to distribute the digital euro on clients’ request.See Chapter IV of the Proposal, available hereShow Footnote It should be noted that the regulation applicable to PSPs is itself under review in the form of a proposed PSD 3, as published on the same date as the SCP, and as analysed in a separate Client Alert.

This Client Alert from PwC Legal’s EU RegCORE provides a focused overview of what the co-legislators have now presented as ‘enabling framework’ for a definite roll-out of the digital euro. How will the distribution of the digital euro affect market participants? Which financial institutions will be affected, if at all? How will the direct contractual relationship with individuals and firms using the digital euro be managed and what functions and/or services will market participants have to conduct on behalf of the euro area central banks? Our EU RegCORE team has laid out what to expect and which aspects to monitor as the legislative process moves forward.

Key takeaways on the digital euro

In the words of the Commission, “... the establishment and regulation of the digital euro is a measure that is necessary to ensure the use of the euro as a single currency in the digital age.”See Proposal on p.5, hereShow Footnote On a similar note, the ECB has echoed repetitively that it aims to strengthen the monetary anchor with a digital euro by preserving access to central bank money with a decreasing overall use of cash as means of payment in an increasingly digitalised economy. It is important, at this stage, to distinguish between the role of the ECB which is confined to issuing and designing distribution, and that of the co-legislators which is confined to adopting an operating framework for the digital euro such as to integrate it into the existing legal and financial framework.

As detailed above, the SCP aims to mutually support and ensure that conventional cash and digital payments continue to co-exist besides payments which could be enabled directly, through the digital euro, in central bank money as a CBDC. As such, end-users would be able to make payments in digital euro via an online banking interface of a regulated bank or payment service provider, a dedicated digital euro app, or via other means – i.e., cards – and pay while shopping on e-commerce websites just as with conventional digital payments. The Commission has detailed that the scenarios allowing for payments in digital euros will eventually expand over time.See Q&A available hereShow Footnote As such, just like payments in cash, end-users may also be able to make payments fully “offline”, that is without an internet connection.In order to withdraw digital euros from their wallets, however, end-users would need to be connected to the internet.Show Footnote

To achieve these objectives, the SCP’s component on the digital euro vests the digital euro with legal tender status. The digital euro itself shall be issued by the ECB and the national central banks (NCBs) of the EU Member States whose currency is the euro. The responsibility for authorising issuance as such, however, lies, as expected, with the ECB. Issuance would thus occur in addition to banknotes which the ECB and euro area NCBs issues on the basis of Article 128 of the Treaty on Functioning of the EU.

As for third-country states having concluded monetary agreements with the EUGranting them rights to produce limited quantities of euro coins, but not to issue euro banknotes.Show Footnote – notably the Principality of Monaco, the Republic of San Marino, the Vatican City as well as the Principality of Andorra – the SCP specifies that use of the digital euro is possible, subject to the monetary agreement providing for it. Besides an international agreement under which a third country commits to a number of conditions, a second requirement for the possibility to access the use of the digital euro means that agreement must also specify certain necessary implementing measures.See Article 19 of the Proposal, hereShow Footnote This implies that for countries using the euro as a de facto currency – i.e., Kosovo and Montenegro – access to the digital euro is likely to remain out of scope of the SCP as they currently have no monetary agreements with the EU.

Accordingly, the digital euro is proposed, if issued, to be made available to natural and legal persons for the purpose of retail payments. As the digital euro would be a (retail) CBDC it is not governed by the EU’s recent Markets in Crypto-Assets Regulation (MiCAR) – see our series of coverage on that development from our EU RegCORE.

Correspondingly a consequence of legal tender status is the mandatory acceptance by payees as laid down in Article 7 of the digital euro proposal component of the SCP. Notably, however, the proposed text states a set of exceptions to this obligation. These include the right of micro-enterprises and non-profit organisations to refuse its acceptance, unless they actually accept comparable means of payment. The latter category includes, for example, debit card payments or instant payment solutions as well as future tech payment solutions used at the point of interaction although they exclude credit transfers and direct debits that are not initiated at the point of interaction. The current proposal’s text further empowers the Commission to adopt additional exceptions of a monetary nature to the digital euro by means of a delegated act.

Eligibility for distributing the digital euro is based on authorisation for the provision of payment services in the EU pursuant to Directive 2015/2366 (PSD 2) – which itself is subject to review in the context of PSD 3, as assessed in a standalone Client Alert from our EU RegCORE. These supervised intermediaries may provide digital euro payment services which covers additional digital euro payment services and basic digital euro payment services. To this end, PSPs would not be required to apply for additional licensing under the current version of the proposal.

In as much as digital euro distribution is intermediated, as mentioned above, a contractual relationship between end-users and the ECB is excluded. Instead, PSPs would need to enter into a contractual relationship with the end-users which, in turn, may hold one or several digital euro payment accounts at the same or at different service providers. Moreover, under Article 14(1) of the proposed text, credit institutions operating a payment account shall offer the entirety of “basic” digital euro payment services to natural personsThat is natural persons residing in a Member State whose currency is the euro.Show Footnote, upon request of their clients.

Under the current proposed text, PSPs are restricted to providing their digital euro payment services to: 

1. Natural or legal persons residing or established in the Member States whose currency is the euro;
2. Natural or legal persons who opened a digital euro account at the time they resided or were established in the Member States whose currency is the euro, but are no longer residing or established in such Member State;
3. Visitors;
4. Natural or legal persons residing or established in Member States whose currency is not the euro, subject to the conditions laid down in Article 18 of the current proposed text; and
5. Natural or legal persons residing or established in third countries, including territories under monetary agreement within the EU.These include, inter alia, the Vatican and Andorra.Show Footnote

Specific tasks PSPs shall carry out for the euro to be used as a single currency across the UnionSee Article 13 of the Proposal, hereShow Footnote

Holding limits
PSPs are to make available funding and defunding functionalities and to enable end users to have their digital euro holdings in excess of any limitations, which the ECB may adopt, ...

Waterfall approach
… automatically defunded to a non-digital euro payment account – commercial bank account – when a digital euro payment account is received.

Reverse waterfall approach
PSPs must also enable end users to make a digital euro payment transaction where the transaction amount exceeds their digital euro holdings.

Digital inclusion support
All PSPs required to provide basic digital euro payment services under Article 14 should provide digital inclusion support to persons with disabilities, functional limitations or limited digital skills as well as elderly people.

Money is generally ascribed three fundamental functions: unit of account, means of payment and store of value. As per its envisaged design, the digital euro is currently arguably (conceptually at least) oscillating somewhere between “real money”, a means of payment and a near-money investment. Article 16 of the proposal calls on the ECB to develop instruments to limit the use – yes, that’s correct, to limit – the use of the digital euro as a store of value, including holding limits. To this end, a set of criteria which the parameters and tools engineered by the ECB should meet are described.

Holding limits, as such, are quite prominently associated with financial stability concerns underlying CBDCs, in particular where they bear interest, and are of importance especially in the initial roll-out phase of the digital euro. Already in its first progress report the ECB had stressed that the digital euro should primarily serve end users as a means of payment and that the storage of large amounts of values in digital euros should not be enabled. To date, however, no decision on a precise holding limit has been taken. ECB Executive Board member Panetta suggested in 2022 that holdings of EUR 3,000 to EUR 4,000 would allow to avoid detrimental effects on financial stability and monetary policy.Available hereShow Footnote Whether such limits remain prohibitively low, effectively depriving the digital euro of attractiveness remains to be seen.

While the proposal (currently) explicitly states that the digital euro shall not bear interest within the framework of the Regulation, it lays down rules on the fees for digital euro payment services. The rationale behind regulating such fees is to ensure that they do not exceed certain levels. Particularly, they shall not exceed the lower of: 

• the relevant costs incurred by the PSPs, including a reasonable margin of profit; and
• the fees or charges requested for comparable means of payment.

The ECB is tasked with regular monitoring the relevant costs, fees and charges as well as to publish and revisit such feed periodically. The responsibility for ensuring compliance with digital euro payment services fee regulation falls on the applicable national competent authorities. On a similar note, competent authorities will have to be designated by the Member States to monitor and enforce the legal tender obligations under the SCP. Interestingly, the Proposal only addresses the supervision by competent authorities and sanction regimes concerning payment services providers headquartered in an EU Member State whose currency is the euro. PSPs incorporated in a Member State outside the euro area are allowed to distribute the digital euro but fall under the supervisory and sanctions regime of the same non-euro area Member State.The SCP entails, for this purpose, a legislative proposal based on Article 114 TFEU.Show Footnote

During the early stages of the ECB’s digital euro project, parallels were often made between the digital euro and banknotes – a “digital equivalent of euro banknotes”.Available hereShow Footnote More recently, with the passing of time this nuance has shifted towards denoting the digital euro more as an electronic means of (retail) payment. Coupled with the publication of various studies on the implications of the digital euro for bank (dis)intermediation and financial stability, arguably hostile with respect to the monetary policy transmission mechanism (for which a stable and functioning banking system is paramount), the importance of technical and design features has gained increasing attention.

What is, at the current juncture, probably more of a public means of payment, the proposed text on the digital euro sets out that the digital euro should be designed in a manner facilitating its use by the general public including the financially excluded (or at risk of being so). Such end users will not be required to have a non-digital euro payment account. The Commission’s proposals, however, recognise that not all functionalities (i.e., (reverse-) waterfall approach) of the digital euro can be provided without a digital euro payment account. Furthermore, the digital euro should be made available for both offline and online payment transactions as of the first issuance of the digital euro, as well as allowing conditional payment transactions.The digital euro should however not be programmable money under the proposed text. In essence programmable money implies that the digital euro could be used, inter alia, only for specific types of transactions involving certain goods or services.Show Footnote

Privacy and data protection issues relating to the digital euro are already and are likely to continue to be hot topics. Article 35 of the proposed text defines the tasks for which the ECB and national central banks may process personal data, including settlement of digital euro payment transactions. The proposed text encourages the use of state-of-the-art security and privacy-preventing measures (i.e., pseudonymisation or encryption) to ensure that data is not directly attributed to an identified digital euro user by the ECB or NCBs.To this end and in the context of personal data processed PSPs, the Commission is empowered to adopt delegated acts.Show Footnote On the flip-side of privacy concerns, Article 37 of the proposal provides for an adjusted anti-money laundering, terrorist financing and financial crime prevention framework for offline digital euro payment transactions, for which the ECB and NCBs will not gain access to personal transaction data and as such enjoy a higher degree of privacy relative to online transactions. Similarly, to current “traditional” cash withdrawals, PSPs will only access funding and defunding data connected to the identity of the user and the relevant amounts either funded or defunded. Financial intelligence Units and other competent authorities can request to have this data transmitted where there is suspicion of AML of terrorist financing.

Given all of the above, PSPs but equally credit institutions are encouraged to commence reflecting and eventually consider the merits of developing their own proprietary front-end services in relation to digital euro payment services as the ECB may only provide an interface as a front-end between digital euro users and the payment infrastructures of PSPs and credit institutions. This reflection should also include the consideration that end users should be able to switch their digital euro payment accounts to another eligible provider at their request.

Third country regime and the digital euro

Access to and use of the digital euro from outside the euro area is regulated under Chapter V of the proposed text. The regime distinguishes between natural and legal persons residing or established in a non-euro area on one hand and those in a non-EU country on the other.

Access from non-euro area Member States
is possible where: 

1. the non-euro area Member State makes a request in this direction and commits to a number of conditions; and
2. the ECB and the non-euro area NCB enter into an arrangement that specifies the necessary implementing measures.

Access from non-EU country
is possible where: 

1. the EU and the third country conclude an international agreement, whereby the third country commits to a number of conditions; and 
2. the ECB and the non-euro area central bank enter into an arrangement that specifies the necessary implementing measures

Access from a territory which has concluded a monetary agreement with the EU is also possible, subject to the monetary agreement providing as such. Cross-currency payments between digital euro and other local currencies are also regulated under Chapter V and should be subject to prior arrangements between the ECB and the relevant non-euro area central banks.

Open issues on the digital euro

As the legislative process for adopting any future EU Regulation on a digital euro has been effectively kicked off, certain crucial components, including a potential remuneration, which would lead to further complexity and move a digital euro closer into the ever-expanding monetary policy toolbox, remain open. It is further unclear, at this stage, whether the regulation of fees for PSPs, not to mention who is to bear such costs, has been assessed comprehensively such as to consider different scenarios from a systemic perspective. 

In its recently published fourth report on the investigation phaseAvailable hereShow Footnote, the ECB emphasises that the compensation model for a digital euro should ultimately benefit end-users – i.e., private individuals acting as payers and merchants acting as payees – but should likewise incentivise PSPs to distribute digital euros to their customers and to provide acquiring services to merchants. To this end, the Eurosystem has proposed a set of four core principles; 

1. a digital euro should be free of charge for basic use of private individuals for their daily purposes; 
2. legislative safeguards should prevent merchants from being overcharged by intermediaries; 
3. intermediaries should still be compensated for the services they provide (i.e., economic incentives; and
4. the Eurosystem would bear its own costs, as for the production and issuance of banknotes.

As the digital euro project investigation is currently still ongoing until October 2023, the Eurosystem is conducting a holistic review of all design options endorsed so far in order to ensure consistency between them, as combined in a high-level product description. It is further noted that while the current proposed text originates from the co-legislators and, as such, sets out the underlying infrastructure for a potentially soon roll-out of the digital euro, the legal basis for effectively issuing the digital euro is unknown at this stage. 

In what is covered by PwC Legal’s EU RegCORE in another Client Alert on legislative efforts to reduce VAT related fraud, which is set to come into effect in 2024, the ECB is currently assessing fraud detection and prevention measures in order to maintain trust in digital euro payments. In as much as protecting end users from fraudulent activities is a top concern for the reputation of, and trust in, the digital euro, the ECB has detailed that both detection and prevention of fraud will very likely be a key feature of the digital euro. To this end the Eurosystem is exploring a central support service and how this could support intermediaries in their own fraud management processes, such as via fraud monitoring and risk scoring of transactions, statistics and coordination of information. PSPs should therefore closely monitor developments so as to align their own processes with what is eventually brought forward by the ECB in this context.

Creating further clarity on the certainty of legal tender

In January 2021 the European Court of Justice (CJEU) issued a judgement laying down the principles of legal tender. Accordingly, legal tender entails the mandatory acceptance of cash, at face value, with the power to discharge from a payment obligation. Correspondingly, creditors are obliged, in principle, to accept any payment made in euro cash which subsequently discharges the debtor from his payment obligation. This applies in the absence of an agreement on the means of payment, as well as other applicable limits to cash payments as in the case of combating tax fraud and evasion.

Currently only euro coins and banknotes are vested with legal tender status in the euro area. Accordingly, and as detailed above, the SCP proposes, among others, to grant legal tender status to the eventually to be adopted digital form of the single currency. In doing so, the SCP would enshrine the January 2021 CJEU judgement in EU secondary law and thereby codify the principles of legal tender. In further regulating the meaning of legal tender in the euro area, the Commission is creating further clarity on the certainty of legal tender which is of utmost importance to ensure consistency among the forms of public money in light of a potential issuance by the ECB of a digital euro. Ultimately, in doing so, the SCP aims to address open issues regarding not only the acceptance of cash in as much as citizens might prefer to pay in cash but also on concerns which have emerged across Member States on complications in accessing cash itself.

Outlook and next steps

As the publication of the SCP is evidence for the pioneering work done jointly at the initiative of the ECB and the EU’s co-legislators, several elements will likely undergo further changes throughout the legislative process ahead. Influences from other similar international developments may continue to further shape the process. 
The SCP’s proposal for a digital euro has now framed the debate that is now to be considered by the EU’s co-legislators, i.e., the European Parliament and the Council. Ultimately, however, the decision to adopt and subsequently issue a digital euro once the Regulation establishing it is adopted by the co-legislators remains with the ECB in line with its mandate and tasks.

The ECB has published its fourth report on the progress on the investigation phase of a digital euro on 13 July 2023 welcoming the legislative proposals under the SCP and underlying its readiness to provide technical support as the co-legislators are expected to request further consultations in the form of ECB Opinions. The ECB’s Governing Council is expected to review the outcome of the investigation phase in autumn 2023 and will then decide whether to instigate a subsequent project phase in which the appropriate technical solutions and business arrangements would be developed and tested. Deutsche Bundesbank president Nagel who sits on the ECB’s Governing Council has recently deemed 2027 as a realistic timeframe for an eventual rollout of the digital euro, emphasising the aim of complementing euro banknotes and coins while ensuring a resilient infrastructure simultaneously.

PSPs and relevant credit institutions are nevertheless urged to start considering the implications, from an organisational and business model perspective, how the digital euro is likely to affect them, as early as possible as it will affect all corners of how business and not just payments are structured, contracted, concluded, executed and settled. Ultimately the digital euro presents itself as a great opportunity for all EU financial services firms and non-financial corporates to move towards greater digitalisation of their business models.

About us

PwC Legal is assisting a number of financial services firms and market participants in forward planning for changes stemming from relevant related developments. We have assembled a multi-disciplinary and multijurisdictional team of sector experts to support clients navigate challenges and seize opportunities as well as to proactively engage with their market stakeholders and regulators.

Moreover, we have developed a number of RegTech and SupTech tools for supervised firms, including PwC Legal’s Rule Scanner tool, backed by a trusted set of managed solutions from PwC Legal Business Solutions, allowing for horizon scanning and risk mapping of all legislative and regulatory developments as well as sanctions and fines from more than 750 legislative and regulatory policymakers and other industry voices in over 170 jurisdictions impacting financial services firms and their business.

Moreover, in leveraging our Rule Scanner technology, we offer a further solution for clients to digitise financial services firms’ relevant internal policies and procedures, create a comprehensive documentation inventory with an established documentation hierarchy and embedded glossary that has version control over a defined backward plus forward looking timeline to be able to ensure changes in one policy are carried through over to other policy and procedure documents, critical path dependencies are mapped and legislative and regulatory developments are flagged where these may require actions to be taken in such policies and procedures.

If you would like to discuss any of the developments mentioned above, or how they may affect your business more generally, please contact any of our key contacts or PwC Legal’s RegCORE Team via de_regcore@pwc.com or our website.