The European Central Bank has published its third progress report on its work on the digital euro, its planned retail central bank digital currency (CBDC). It is currently in the preparation phase, which runs until the end of October, at which time a decision will be made on whether to launch it. This decision depends on the passage of supporting legislation.

The update covers work on the digital euro rulebook, the recent exploratory work with market participants on innovative applications, and ongoing stakeholder engagement.

Offline digital euro

One of the more interesting aspects was an update on the ECB’s approach to an offline digital euro. Technically, this is a very challenging area – ensuring that payments remain secure and avoiding double spending, despite the inability to connect to payment systems. While offline payments are often designed for regions with weak internet connectivity, they become critical during emergencies when digital currency might be the primary payment method if cash usage has declined.

Hence, the ECB is exploring the ability for payments to continue working if payment systems remain offline. This is very tricky because most offline systems will only work for one or two hops. In other words, if I pay you by tapping your phone, you can use the same money to pay someone else, but after that, the system usually expects some kind of connection to the payment system.

The central bank is also investigating how to enable top ups for the digital wallet in this outage scenario. Other jurisdictions have run small scale experiments by appointing trusted parties to provide funds. We’re speculating here, but one could imagine walking into a bank branch during an outage. A customer could use Bluetooth to receive money from a bank handheld device by presenting a card and matching identity document.

Work on an offline digital euro makes up more than half of the ECB’s outsourcing costs. Later this year, the central bank will select providers for five pieces of work. Risk management and digital euro app development represent the second and third largest aspects of the €1.1 billion budget.

Budgets and legislation

On the topic of budgets, a recent piece of PwC research commissioned by European banking bodies, including the European Banking Federation, estimated that the implementation costs to banks could reach €18 billion, excluding offline and point of sale integration functionality. It highlighted “significant concerns over the financial and operational viability of the digital euro in its current form for retail banks in the euro area”. The ABI, the Italian banking federation, which is supportive of the digital euro, previously estimated €880 million for its member banks. Separately, Ledger Insights is aware of concerns about the specific design used for payments, which is very different from how SEPA instant payments operate and will require significant technical work to support it.

These costs were amongst the concerns raised during recent discussions with President Lagarde in the European Parliament. Conversely, the ECB has been quite successful in rallying a sense of legislative urgency with the European Council made up of the nation states, because of the Trump administration’s support of stablecoins which are mainly dominated in dollars. The concern seems to be about monetary sovereignty. We’ve previously reported that Europe’s MiCA regulations have some reasonable safeguards, limiting the mainstream use of foreign denominated stablecoins for everyday payments.

The question remains whether Parliament will pass legislation by the time the preparation phase ends in late October.