On 28 June 2023, the European Commission (EC) introduced three new proposals to regulate the digitalisation of the Euro currency, resulting in a transformative leap in the financial landscape by redefining the way transactions occur and underscoring the European Union's commitment to adapt to the digital age.
Background
The growing influence of digitalisation and technological advancements is significantly impacting both the European economy and peoples’ transaction habits. Private digital payment methods are the new norm; however, traditional forms of central bank money, like banknotes and coins, struggle to meet the demands of the digital age. As a result, the lack of a stable and unified form of central bank money which compliments the digital era might potentially undermine trust in the Euro.
To address this challenge, the issuing of a retail Central Bank Digital Currency (CBDC) has gathered attention recently, particularly within the European Union (EU). This type of CBDC, distinct from cryptocurrencies, could be an official digital form of central bank money directly accessible to the public and backed by the European Central Bank (ECB).
Several other central banks from other countries, such as Sweden, the United Kingdom, China, and the United States, have also embarked on CBDC research and implementation. The shift towards a digital Euro reflects the EU's commitment to modernise its financial systems and unify digital payment to Member States, including members that have not adopted the Euro. The package might provide a framework to a potential co-existence of the Euro in a new digitalised form, which the ECB may choose to implement in the future, serving as a compliment to cash.
Current Position of the Law
The proposal for a digital Euro stands as a strategic response to the transformative wave of digitalisation that is sweeping through financial systems, signalling a concerted effort to modernise and adapt European payments to the contemporary digital landscape.
Central to this envisaged legal transformation is the positioning of the digital Euro as a direct liability of both the ECB and the national central banks within the eurozone. This design is reminiscent of the legal treatment of physical Euro currency. The proposed integration within established legal structures, such as the Payment Services Directive (PSD2, as will be replaced by proposed PSD3 and PSR), the Cross-Border Payments Regulation (as will be amended by the proposed regulation), the Anti-Money Laundering Directive (AMLD5, as will be replaced by proposed AMLD6 and AMLR), and the Funds Transfer Regulation, reflect a forward-looking approach to harmonise digital Euro transactions.
Of significant importance is the digital Euro's designation as a legal tender, obligating its acceptance at face value without the imposition of surcharges. The proposed distribution mechanism envisions private payment service providers, including banks, playing a pivotal role in facilitating access to digital Euros through diverse payment services. For instance, basic digital payment services must be provided to individuals for free, such as opening and maintaining digital Euro payment accounts, and other listed fundamental services, such as: funding/defunding from/into cash; initiating and receiving digital Euro payment transactions (i.e., person-to-person); via an electronic payment instrument; or providing such instruments.
Furthermore, the introduction of a retail CBDC is geared towards providing state-of-the-art payment methods, all the while maintaining the pillars of privacy, financial stability, and accessibility. However, this progression brings about certain pivotal choices that must be carefully addressed. For instance, CBDCs can be categorised into two distinct types: a) account-based (trusted third party validates the account holder's identity and verifies the account balance before permitting a payment transaction, with subsequent debiting and crediting of accounts) and b) token-based (a digital token is issued by the central bank, representing a monetary claim and allowing transfers without establishing a direct current-account relationship with the central bank). These alternatives necessitate thoughtful consideration to determine the most fitting model for the envisioned retail CBDC.
How and Why the Law is Changing
The proposed changes aim to adapt to digitalisation and technological advancements, in order to reshape economic activities and payment behaviours into a unified system, due to the growing need for a modern and efficient form of central bank money that can seamlessly function in the digital age. To address these challenges, the proposal for the digital Euro seeks to establish a comprehensive legal framework that ensures the availability of central bank money with legal tender status for digital payments.
Payees have the right to decline digital Euro payments under conditions outlined in Article 9. The digital Euro's convertibility mirrors that of physical Euros, scriptural money, and electronic money. In situations requiring acceptance of both digital Euro and physical cash, the payer holds the choice. In addition, chapter six delves into digital Euro use beyond the Euro area, contingent on residency or establishment in non-Euro area Member States or third countries, subject to conditions detailed in Articles 18 to 21. Chapter seven addresses technical aspects, emphasizing the digital Euro's user-friendliness for the general public, encompassing individuals facing financial exclusion, vulnerability, impairments, functional limitations, inadequate digital skills, and the elderly.
Consequences and Changes to the Law
CBDCs are not immune to private international law implications. The issue of payment currency is a crucial component that private international law cannot overlook. A key concern revolves around determining appropriate connecting factors for this currency. Questions arise regarding the weight of criteria like locus rei sitae and lex rei sitae, and whether these can be applicable to a currency. The role of private autonomy and its potential limitations also requires consideration. Addressing these matters becomes pivotal in cases where CBDC is involved in cross-border contracts, necessitating boundaries and rules. In the realm of jurisdiction, determining the relevant court is significant, involving intermediaries and account holders.
Considering these challenges, historical parallels suggest the need to adapt existing rules or formulate new ones. A notable resource in this field is the Hague Conference on Private International Law's ongoing work, such as the "Proposal for Exploratory Work: Private International Law Aspects of Central Bank Digital Currencies (CBDCs)."
For the Cyprus market, this change bears significant consequences and results. It heralds a new era of streamlined transactions, providing citizens and businesses with a seamless digital avenue for payments. The digital Euro's legal tender status ensures its universal acceptance, levelling the playing field for diverse economic players. It empowers individuals with greater control over their financial transactions, fosters financial inclusion, and bolsters the digitalisation efforts in Cyprus.
In recent development, the European Union has presented new proposals for the digital Euro, a pioneering digital currency poised to revolutionise the realm of financial transactions. This strategic initiative, designed to offer advanced payment methods while ensuring financial stability, privacy, and accessibility, emerges as a strategic response to the rapidly evolving digital landscape.
By Eva Manolova
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