The European Parliament and the Council have put forth a significant proposal to introduce a digital version of the euro, commonly referred to as the "digital euro." The proposal seeks to harness the benefits of digitalization in the financial sector while addressing potential legal challenges and ensuring financial stability. This article delves into the legal aspects of this proposal, aiming to shed light on its potential impact and highlight the issues that warrant careful consideration.

Overview of the Digital Euro Proposal

The proposed regulation outlines the key elements of the digital euro framework, including the role of the European Central Bank (ECB) in issuing and overseeing the digital currency holding legal tender status. It aims to provide a secure, accessible, and cost-effective means of conducting digital transactions within the European Union.

Legal Implications and Challenges

A. Financial Inclusion and Accessibility:

The proposal should consider the accessibility of the digital euro, especially for vulnerable groups (such as individuals with functional limitation or limited digital skills) and those without access to digital technologies. Ensuring financial inclusion is maintained during the transition to digital currency is vital to prevent exacerbating existing socio-economic disparities.

B. Payment Service Providers (PSPs):

According to Directive 2015/2366, payment service providers have the authority to offer digital euro payment services to the following categories of individuals and entities:

1. Natural and legal persons residing or established in Member States that use the euro as their currency.
2. Natural and legal persons who had opened a digital euro account while residing or being established in Member States that use the euro as their currency but have since moved away from those Member States.
3. Visitors to Member States that use the euro as their currency.
4. Natural and legal persons residing or established in Member States that do not use the euro as their currency, provided they meet the specified conditions.
5. Natural and legal persons residing or established in third countries, including territories under a monetary agreement with the European Union, subject to additional conditions.

C. Data Protection and Privacy:

The implementation of the digital euro will involve the processing of substantial amounts of personal data during transactions. It is crucial for the proposed regulation to adhere to the principles of the General Data Protection Regulation (GDPR) to safeguard individuals' privacy and ensure secure handling of data. Tasks that involve processing personal data will only be considered in the public interest if they serve specific purposes, such as enforcement of limits, funding, and defunding, and fulfilling Anti-Money Laundering (AML) obligations of Payment Service Providers (PSPs).

D. Cybersecurity and Anti-Money Laundering:

The digital euro will attract cybercriminals seeking to exploit vulnerabilities in the system for financial gain. It is essential to build a robust cybersecurity infrastructure to protect against potential cyberattacks and fraud. The proposal addresses these concerns and provide a clear strategy for managing such risks.

The proposal empowers the Anti-money Laundering Authorityof the Union (AMLA) to issue guidelines specifying the interaction of AML/CFT requirements and the digital euro payment services.

Monetary Policy, Legal Framework, and Interplay with Existing Regulations

The introduction of the digital euro could have significant implications for the EU's monetary policy. Policymakers must ensure that the digital currency operates in harmony with the existing monetary framework and does not undermine financial stability.

Striking the right balance between digital currency and traditional cash in circulation will be crucial to maintain control over money supply and inflation. This is especially important since the digital euro can be converted into cash. The proposal mentions several pieces of legislation as applicable to the digital euro, including:

1. Regulaiton 2021/1230 on cross-border payments in the Union.
2. Directive (EU) 2015/849 on the Prevention of the use of the Financial System for the Purposes of Money Laundering or Terrorist Financing.
3. Directive (EU) 2015/2366 on Payment Services in the Internal Market, etc.

The ECB is empowered to adopt detailed measures, standards, and rules to further protect the individual’s rights.

Conclusion

The proposal for the establishment of the digital euro presents an ambitious initiative to enhance the EU's financial ecosystem. However, it must overcome various legal implications and challenges to be successful. Careful consideration will be crucial to develop a robust regulatory framework that fosters trust, innovation, and financial stability in the digital age. The collaborative efforts of policymakers, regulators, and stakeholders will be instrumental in shaping the future of the digital euro within the European Union.

This article was written by Ms Jodie Arpa. 

For more information, please contact Dr Ian Gauci or Dr Cherise Abela Grech.