IIF Finds Gaps in European Commission’s Digital Euro Legislation

The Institute of International Finance (IIF) an advocacy organization focused on finance based in Washington D.C. And operating in 60 countries has conducted a review of the European Commissions proposed legislation for the digital euro. According to their assessment the proposal is found to have effectiveness.

In their evaluation the IIF examined seven areas covered by the legislation and determined that six of them were only partially addressed. For example they found that the cost benefit analysis provided in the proposal was oversimplified and relied heavily on existing research or was altogether lacking.

Regarding measures for ensuring stability and facilitating bank intermediation, such as setting holding limits there is a lack of clarity on how these limits would be implemented or enforced. The study also highlights concerns about payment services providers (PSPs) being able to recover expenses associated with offering euro services, such as software development and infrastructure connection due to fee restrictions. Similarly traditional banks are required to provide digital euro services free of charge which raises questions about economic feasibility and risk management.

The draft legislation does not yet specify privacy safeguards for the euro. This leaves it uncertain what actions PSPs must take to comply or whether compliance will be feasible once the digital euro is introduced. Additionally provisions regarding Anti Money Laundering measures and cybersecurity remain undefined, at this stage.

Furthermore the IIF expressed concerns regarding governance and possible conflicts of interest. The responsibility for issuing, managing and setting fees for the euro would lie with the European Central Bank (ECB) which would also act as its regulator. The IIF emphasized the need for oversight of the ECB in its multifaceted role.

The IIF also stressed the importance of interoperability arguing against creating systems that would be inefficient and costly. They believe that a Central Bank Digital Currency (CBDC) should be compatible with platforms supporting digital currencies.

The legislative framework for the euro is being developed alongside its technological infrastructure. Currently the digital euro is still in a stage, until October, when practical and technical solutions may be tested by the ECB. Once legislation is finalized can a fully functional digital euro be introduced.

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