Book Report
BABEL Views on A Digital Euro
The BABEL response to the ECB consultation Florence, 12th January 2021
User perspective (15779)
How would you rank, in order of importance, the features that a digital euro should offer? (213414) Type: (R/ranking)
Rank #1: A4 -
I want to be able to pay even when there is no internet or power connection.
Rank #2: A7 -
I want it to take the form of a dedicated physical device.
Rank #3: A8 -
I want it to be a secure means of payment.
Rank #4: A5 -
I want it to be easy to use.
Rank #5: A6 -
I want to use a digital euro without having to pay additional costs.
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Rank #6: A9 -
I want my transactions to be completed instantaneously.
Rank #7: A2 -
I want my payments to remain a private matter.
Rank #8: A1 -
I want to be able to use it throughout the euro area.
Rank #9: A3 -
I want to be able to use it with my smartphone and at payment terminals.
Do you have any further comments about the ranking that you have indicated above? (213508) Type: (T/text-long)
According the BABEL-Blockchains and Artificial intelligence for Business, Economics and Law research team at the Department of Economics and Management at the University of Florence (hereinafter BABEL), at this stage, central banks' attention focused on the design model of CBDCs. However, there is a tendency to underestimate the most relevant aspect: we are dealing with digital assets. The transformation from physical to digital assets can take place in many ways. However, CBDCs cannot be considered a digital alternative or complementary to cash due to their monetary function. They are necessarily fiat money. That is clear if one focuses on the moment of custody of CBDCs. Their possession can take place in terms different from those underlying cash. And it can bring with it aspects hitherto foreign to cash. The aboveproposed ranking takes this aspect of CBDCs into account, as well as the underlying answers.
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Do you envisage any challenges associated with a digital euro that would prevent you or others from using it? If so, what are they? (213415) Type: (T/text-long)
The BABEL team interprets the challenges associated with the digital euro by identifying them as inherent features of any digital currency. Adopting a priority order, these requirements can be determined as follows: a. Openness to all European citizens (absolute requirement) and a fairer transaction pricing than electronic means of payment; b. Practical legal tender status, which requires a law reform; c. Transparency in the development process; d. End-users' data protection as part of the EU digital sovereignty; e. Reliability of device and tools used to manage it. In our opinion, a lack of all the above requirements (OPTER) would cause the project fail.
What user features should be considered to ensure a digital euro is accessible for people of all ages, including those who do not have a bank account or have disabilities? (213416) Type: (T/text-long)
Concerning financial inclusion, a digital Euro project should consider the following features in order of priority: a. A digital Euro should not cause an abrupt change in our society's structure (and of our habits). b. Various citizen-centric devices should support Digital Euro. c. At least some of these devices should be affordable and easy to use by everyone, even by our community's marginal classes. d. These devices should offer easy integration with many community services, for example, in a smart city environment. e. To accomplish this, at least a primary form of Digital Identity and Multi-Factor Authentication should be made available on those devices. The BABEL team would like to note letters c. and e. are not necessarily in conflict, as executing a simple payment will not require Digital Identity functionality. The most integrated citizen-centric devices are called Universal Access Devices (UADs), and we will thoroughly explain their features in the following answers.
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There are two approaches we can take to make a digital euro work, one that requires intermediaries to process the payment and one that doesn’t. If we design a digital euro that has no need for the central bank or an intermediary to be involved in the processing of every single payment, this means that using a digital euro would feel closer to cash payments, but in digital form – you would be able to use the digital euro even when not connected to the internet, and your privacy and personal data would be better protected. The other approach is to design a digital euro with intermediaries recording the transaction. This would work online and allow broader potential for additional services to be provided to citizens and businesses, creating innovation opportunities and possible synergies with existing services. For example, it could make it easier to integrate a digital euro into currently available electronic banking services and applications. From your perspective, which of the following do you find most appealing? (select one): (213417) Type: (!/list-dropdown)
A3 -
a combination of both.
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Do you have any further comments regarding your answer to the question above? (213509) Type: (T/text-long)
While supporting the idea of offering both functionalities, the BABEL team suggests prioritizing the b. option, according to the following line of reasoning: 1. Offline use capability becomes capital during natural calamities when the physical circulation of money cannot be guaranteed, and many of our networks will have already failed. 2. As digital Euro is not a complete replacement of cash; it could still be used when offline operation and/or privacy will be required in our day-to-day life. 3. People do not object to having supranational intermediaries processing their payments, even when they are not from Europe. 4. However, as offline use and privacy are both essential features of cash, digital Euro should guarantee them to some degree, as explained in later answers.
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Financial, payment and technology professionals’ perspective (15776)
What role do you see for banks, payment institutions and other commercial entities in providing a digital euro to end users? (213354) Type: (T/text-long)
The BABEL team suggests making a distinction between issuance and circulation. While it supports an indirect model for the digital Euro issuance, it advocates a more direct model for its circulation. A stylized description follows: 1. Commercial banks and other licensed intermediaries deposit central bank money with the ECB. In return for these guarantees, ECB will provision batches of digital Euro to its intermediaries. 2. Present-day commercial bank accounts will work exactly as now, supporting only "commercial bank money". End-users (citizens and legal entities) will not manage digital Euro on their present-day accounts. 3. End-users will be granted a digital Euro "bare-bones account" with only debit/credit capabilities and carrying zero fees. So that, for this consultation's goal, it does not mind where these "bare-bones accounts" are opened. 4. An intermediary will supply digital Euros to end-users: • By crediting their "bare-bones account" (in digital Euro) • And by debiting the same amount from their present-day account (in commercial bank money) and its digital Euro provision 5. When an end-user will need converting digital Euros to "commercial bank money", the intermediary will: • Debit the user's "bare-bones account" (in digital Euro) • Credit its digital Euro provision and the end-user's present-day account (in commercial bank money). 6. Unbanked citizens will own only a "bare-bones account", so they will have access to the digital Euro without incurring any fees. However, they will be under the same liquidity controls of other end-users. 7. All payments in digital Euro will be routed to the "bare-bones account" by payment services and executed in the digital currency. 8. Crediting/debiting the present-day account (in commercial bank money) could implement liquidity control (keeping the balance of the "bare-bones account" between acceptable values).
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A digital euro may allow banks and other entities to offer additional services, on top of simple payments, which could benefit citizens and businesses. What services, functionalities or use cases do you think are feasible and should be considered when developing a digital euro? (213369) Type: (T/text-long)
a. Crediting any sort of payment to citizens, as in subsidies, pensions, etc. b. Programmable money, meaning banks could start offering smart-contract based custody and escrow services for digital Euro on state-of-the-art Blockchains. c. A new generation of digital Euro-denominated Blockchains, whose active accounts will be directly expressed in digital Euros, instead of some conventional units like Ethereum. Presently, state administrations and other public entities cannot directly manage Blockchains as they cannot handle payments in non-legal-tender currencies. So, any state-of-the-art Blockchain-based procedure meets a bottleneck when a public entity should access any data. Moreover, almost any exchange of data with it will have to be backed by a payment. A new generation of CBDC-backed Blockchains (already under development in China) could cut down the paperwork, improving public administration's public sentiment. As already stated, the BABEL team advocates that digital Euro should integrate some basic form of Digital Identity, maybe as a later development. The trend of employing a financial basis to prove identity is already well-established: airlines, for example, are basing their speedy check-in procedure on credit cards and passports. Single-sourcing both Digital Identity and payment services will enable the cryptographic signature of commercial contracts and the certified exchange of payments and fees, opening a whole new use-case class. d. Rental subsidies are usually provided to low-income tenants. A complex workflow is required to receive them, starting with the manual signature and registration of the lease contract, the payment of advance instalments, real estate agency fees, etc. Integrating legal activities and payments on a blockchain would speed the process and reduce the opportunities for fraud. e. Another complex workflow is about choosing the more convenient insurance package for a car and buying it. To achieve this, the customer must show the car property title and car history. After an advance payment takes place, a contract is signed. As in any other process related to a car life-cycle, many things may go wrong: checks could bounce, car data could be doctored, etc. Again, the only way to speed up the process is to integrate all activities on the same support (probably, a Blockchain).
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What requirements (licensing or other) should intermediaries fulfil in order to provide digital euro services to households and businesses? Please base your answer on the current regulatory regime in the European Union. (213370) Type: (T/text-long)
The EU legislator should amend the current EU financial market regulatory regime by introducing a reservation of economic activity related to the circulation and custody of the digital Euro. Such a solution would be optimal to manage digital currency separate from physical cash, namely, to ensure appropriate interoperability between different platforms and regulatory frameworks. The requirements needed should be more comfortable than that provided for e-money and banking services other than that provided by the single jurisdiction. So, capital requirements would not be a must in this perspective, whilst the corporate representatives' suitability would remain a discriminating factor.
Which solutions are best suited to avoiding counterfeiting and technical mistakes, including by possible intermediaries, to ensure that the amount of digital euro held by users in their digital wallets matches the amount that has been issued by the central bank? (213373) Type: (T/text-long)
According to what we stated answering the question above, the most restrictive approach would be preferably by now. Even if this solution could be an operational burden for the Eurosystem, it neutralizes the choices that can affect the digital monetary system caused by intermediaries. Digital euro issuance should be close to the payments system and sovereign debts. The BABEL team suggests ECB manage digital Euro through two parallel structures, the first for fiduciary money and the latter on a digital platform.
What technical solutions (back-end infrastructure and/or at device level) could best facilitate cash-like features (e.g. privacy, offline use and usability for vulnerable groups)? (213377) Type: (T/text-long)
At an early stage, the digital euro design should not be a reason for a limitation in the technical choices that can create a system like the physical cash already in circulation. While a combination of the two systems (back-end and device) is not irreconcilable, it is nevertheless preferable to start with a technical solution that best suits the needs of a system separate from the one involving intermediaries more broadly. page 12 / 19
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Financial, payment and technology professionals’ perspective (15794)
What should be done to ensure an appropriate degree of privacy and protection of personal data in the use of a digital euro, taking into account anti-money laundering requirements, and combating the financing of terrorism and tax evasion? (213382) Type: (T/text-long)
CBDC's features make it easier, from one side, to fight AML, CFT and deter tax evasion, but, on the other side, they require to modulate the claim to personal data protection. However, programmability and microtransactions emerge the potential for new illicit financial techniques so that a selective approach for personal data protection could be not enough to limit financial crimes. UADs become relevant because they are custody and transmit CBDC through payment interface providers. Any unhosted wallet should be prohibited. Global CBDC standard should be encouraged.
The central bank could use several instruments to manage the quantity of digital euro in circulation (such as quantity limits or tiered remuneration), ensuring that the transmission of monetary policy would not be affected by shifts of large amounts of commercial bank money to holdings of digital euro. What is your assessment of these and other alternatives from an economic perspective? (Tiered remuneration is when a central bank sets a certain remuneration on holding balances of digital euro up to a predefined amount and a lower remuneration for digital euro holding balances above that amount.) (213389) Type: (T/text-long)
A parallel two-way system where physical cash and digital currency are not interchangeable could be the solution at a first stage. It would permit to have time to understand better the CBDC ecosystem's functioning and the opportunity to transform the physical cash into CBDCs.
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What is the best way to ensure that tiered remuneration does not negatively affect the usability of a digital euro, including the possibility of using it offline? (213390) Type: (T/text-long)
A tiered remuneration should help control the liquidity of the monetary system and limit the quantity in circulation. What is different are the effects that each provision could have on the usability of a digital Euro. A solution could be the possibility of a remuneration given to a CBDC holder according to a loan scheme. Consequently, offline wallets and outgoing international investment flows should not affect the usability of a digital Euro.
If a digital euro were subject to holding balance limits, what would be the best way to allow incoming payments above that limit to be shifted automatically into the user’s private money account (for example, a commercial bank account) without affecting the ease of making and receiving payments? (213391) Type: (T/text-long)
The BABEL team suggests ECB should consider imposing the limit on the digital euro's use only for those who are already holders of a current account.
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What would be the best way to integrate a digital euro into existing banking and payment solutions/products (e.g. online and mobile banking, merchant systems)? What potential challenges need to be considered in the design of the technology and standards for the digital euro? (213392) Type: (T/text-long)
An evolutionary path has already been started for the integration process. Dependencies are to be expected: for example, legal requirements may impact the organization plan. So, integration should be carried out at multiple levels: we should not be afraid of introducing new legal concepts when needed, as it happened with the novation institute now at the basis of TARGET2 processing. At the moment, experiments are carried out in different directions. Many of the steps described are a logical consequence of the digital Euro circulation scheme envisioned above. a. The first feasibility test is through issuing a wholesale digital Euro through special double-ended accounts. This operation can be likened to tele-transport central bank money from a national component (say, "TARGET2-Banque de France") to a blockchain token-based representation and back again. b. Another activity tests whether state-of-the-art central bank money can support the execution of smartcontracts. This requires downloading daily balances from a national component (say, "TARGET2-Bundesbank") to a blockchain to trigger event-based programs. c. Together, an internal optimization/expansion of the TIPS real-time payment system is carried out, to verify its capability to support the digital Euro-denominated "barebone accounts". d. Probably, the next step will be to interface the improved TIPS to a payment service, to verify the operation of some basic payment functions. e. The bigger problem at the level of banking intermediaries is to shield their traditional operations, for commercial bank money, from the new digital Euro circulation system. f. As intermediaries are playing a major role in the two-tier retail CBDC distribution system, this would require creating automatic provisioning of the TIPS-based "bare-bone accounts" from the customers' banking accounts.
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Financial, payment and technology professionals’ perspective (15793)
What features should the digital euro have to facilitate cross-currency payments? (213393) Type: (T/text-long)
a. By now, nostro/vostro accounts handle most cross-currency payments. With the introduction of a worldwide network of CBDCs (i.e. digital Yuan, digital Euro, digital Yen and digital Dollar), a new generation of digital exchanges will start competing with present state-of-the-art international payment systems (i.e. SWIFT). b. So, accredited digital exchanges should comply with some form of travel rule, and the system should guarantee that healthy controls will enforce international sanctions on both inbound and outbound flows. The new workflow developed for SWIFT is a crucial starting point for setting these control basic requirements. c. As a consequence, digital exchanges will become essential components of the financial industry. Europe should start developing this technology. The ECB should define an API standard for supporting their operation, instead of the usual message-based specifications.
Should the use of the digital euro outside the euro area be limited and, if so, how? (213394) Type: (T/text-long)
a. CBDC's specific forms help contain circulation easily. About a wholesale digital Euro, programmed safeguards ensure nobody would siphon off that liquidity as a form of low-cost way of borrowing money. In its retail version, similar mechanisms could prevent liquidity thesaurization (hoarding). b. Clearly, we cannot put strong constraints on the circulation of money for personal use, as we have already agreed a liquidity control mechanism must be set up anyway. With the introduction of a few national CBDCs, digital exchanges will ensure a quick way of moving money simply by exchanging it from a CBDC to another. Apart from these organizations, the liquidity control mechanism should constrain circulation. Having a mass of fast-moving money flowing across the globe, seeking for the best remuneration, is a sure recipe for two-digit inflation, like it happened with the Eurodollars in the seventies.
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Which software and hardware solutions (e.g. mobile phones, computers, smartcards, wearables) could be adapted for a digital euro? (213396) Type: (T/text-long)
a. BABEL has been advocating a multi-functional device. At a first level, the UAD could be as an abstract device offering the integration of both payment function and digital identity. This concept is used for evaluating use-cases through functional integration and for defining organizational requirements: for example, what workflow should be needed to handle seizure requests from national judiciary powers? b. BABEL is reasonably agnostic about the implementation of the UAD. It could be implemented as a collection of smartphone apps, provided some essential security requisites are satisfied (at the moment, only top-level smartphones have a safe enclave chip). The fundamental problem of this approach is many smartphones are with proprietary architectures so that trade secrets protect whose details. c. At an elementary level, BABEL is carrying out a feasibility study of the UAD like a FOSS (Free and OpenSource Software) platform, hosting a highly secure enclave computing structure, with FPGA (Field Programmable Gate Array) chips.
What role can you or your organisation play in facilitating the appropriate design and uptake of a digital euro as an effective means of payment? (213397) Type: (T/text-long)
a. BABEL members are already modelling advanced use cases for vertical sectors of the economy, like automotive and smart cities, advocating using Universal Access Device, integrating payment and digital identity. b. BABEL members already focused their activity on the structure of the Blockchain governance, aiming to evaluate the feasibility of a digital Euro-based Blockchain, and the interoperability with the already operative digital currency platforms. c. BABEL is ready to collaborate with other research centres, academic or not, about digital identity and multi-factor authentication on portable devices with specific competence on the related economic and legal issues.
European Central Bank Š 2019 All rights reserved.
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The BABEL team, on behalf of the Scientific Coordinator, Mr Filippo Zatti, would like to prove its gratitude and thanks to Ms Rosa Giovanna Barresi, LLM(FU), Associate Member of BABEL, for her substantial contribution to the contents' definition response to the European Central Bank's consultation on a digital Euro