Legal Design of Digital EURO

The paper on the digital euro and its legal design aims to assess the benefits, balanced against the risks, of introducing the digital euro on the territory of the European Union as a response to the rapid development of digital finance. The proposed EU legal framework for CBDC is analysed from the perspective of regulatory role and mitigation of possible risks of infrastructure shocks enabled by the invasion of central bank money into democratic economy, as of October 2024. In this publication we offer only the short summary, while the whole analysis could be freely downloaded from SSRN website.

Everyone's life would be affected by the Central Bank Digital Currencies (the CBDC), which would change the financial relationships between all banks, corporations, small businesses and ordinary people. There could be positive or negative outcomes, and knowledge from other nations that have already adopted digital currencies could be helpful. Advantages and disadvantages (or concerns) of implementing a new financial model should be vastly explored, as well as the underlying regulatory landscape (including technological elements).

The first to deal with the new currency would be the banks, since they are the inevitable intermediaries (in terms of payment and know-your-customer services) between the end user (individuals, companies) and the ultimate issuer (the central bank). In order to adapt their current activities to the reality of the new digital currency, banks would have to undertake a great deal of work in the areas of information technology and law. In the future, banks might also provide new financial services and products like conditional payments, smart contracts, and digital currency exchange transactions with a widely accepted, cheap, secure and resilient form of public money in the euro area.

The popularity of cryptocurrencies today has grown to the point where government authorities have been faced with the problem of combating it and regaining control over the monetary mass, preventing unreported and fraudulent financial transactions. Due to new technologies and the introduction of crypto assets, governments have lost much of their control over cash flows and thus the power to effectively manage state monetary policy and regulate national economies with a potential risk to financial stability.

The only way to get control back is the creation of an official and government-regulated rival – a digital currency with a legal status (tender). Mere prohibition of use of cryptocurrencies is no longer a solution taking into account how large the crypto-world has become since 2009 when the first Bitcoin has been created by Satoshi Nikamoto. Estimated capitalization of crypto turnover is more than 1 trillion US Dollars globally and it involves too many players, including also governments (like El Salvador with Bitcoin as a legal tender) and big corporations (e.g. Tesla owing 184 million US Dollars net in digital assets). In a situation where some of the players have already legalised crypto, simply abolishing it would not have the effect of excluding them, and that is why there is a need for a competitor – a more attractive financial solution.

However the Eurozone is probably the trickiest place on the Earth to regulate a stately-backed digital currency due to its essential characteristics of united Member States sharing common rules and regulation with the European Central Bank in the core of its monetary policy and banking supervision as opposed to 27 individual legal systems and authorities in each of the Member States, and 7 countries that still did not introduced euro as a national currency (non-euro area). The process now looks much like launch of euro for the Eurozone in 2002 but on a next level of technological and legal complexity calling for cooperation of not only central banks and governments, but also commercial banks and IT specialists in respect of cybersecurity and smooth provision of digital services.

The European Union is now faced with a problem of multi-level regulation within its territory and the need to introduce new legislation at two levels: for euro and non-euro countries (Member States, whose currency is not the euro, require a separate regulation). How this challenge is tackled and what are the benefits and corresponding concerns of the proposed digital euro is the subject of following research.

In addition, the issue is not just legal but also economic and political: the EU must determine how national central banks and the ECB, which will oversee and issue the new currency, will work together on issues related to the accounting, storage, security, reporting, updating and regulation of digital assets. The political challenges are further compounded by the disparities in income among the Member States and the opportunities to provide equal technical supervision for the new currency, absorption of local currency liquidity and competition of national currencies against centralized euro also add to political bucket of the problems.

On the other hand, CBDC is an inevitable step of digital and financial progress that have to be faced the sooner the better. Political and economic rivals like China and Russia have already implemented CBDC into practice and are actively testing it with real economy players. So, protraction could cost a lot. But the decision has to be balanced in its legal regulation in order not to ruin financial balance of all the Member States, to ensure individuals’ right for privacy and safety of funds, bank secrecy, currency exchange rules and AML compliance, the EU macroeconomic impact.

Some say that digital euro is a threat to economy, private life and data privacy, and besides digital money can be easily hacked or stolen entailing massive disruption of the whole EU market. But the real problem is a huge monetary mass of crypto (emoney and digital assets) that were generally unregulated until recently and were issued by uncontrolled and uncertificated private parties (prior to EU MiCA enactment) and are currently circulating globally threatening the global economy, and CBDC seems to be the only way of mitigating this threat, by putting the financial masses back into trusted and regulated harbor.