Implementation of the Digital Euro

Posted on Oct 27, 2023 by Wolfgang Berger, Partner and CTO Banking and Financial Markets (DACH), IBM Consulting


The digital euro will enter a highly competitive, multifaceted, and heterogeneous payments landscape in the Eurozone. As with any other payment method, it needs to provide additional value for the variety of stakeholders to achieve the envisioned acceptance among users. Therefore, we see the following aspects as levers for a successful digital euro:

Build on existing rails and provide enhancements for the digital euro

We think the initial acceptance of the digital euro will be very much determined by simplicity and similarity in usage and operations with other well-established payment methods, besides commercial models, costs, and innovation. Hence, there should be aspiration to benefit from existing rails and standards but provide enhancements where needed, including uniformity across the Eurozone, also referenced by the European Commission. This will avoid slow adoption rates, unnecessary new technical specifications, and expensive implementations.

For long-term success, foundations for innovations need to be built, particularly for strong privacy and uniform digital payments, including support for virtual worlds and tokenized economies.

Extend PSD2(3) with a standard digital euro API for incumbents, FinTechs, and TPPs

A key element will be the active support from the intermediary landscape, which in itself is very heterogeneous. It ranges from FinTechs, mainly building their business models on sharp value propositions with a strong focus on innovation, to traditional incumbents with an established and rich product set for retail clients and businesses.

We propose to utilize the PSD2(3) role model to its full extent, including third party provider (TPP) roles, to support fast adoption rates. Subsequently, the digital euro would benefit from solutions already in the market and enable new solutions built within the same regulatory framework.

Extending PSD2(3) with a digital euro-specific standard interface would enable new innovations, such as strong privacy. Such an extension could build on quantum-safe encryptions and utilize existing technical rails.

Enabling this path would provide a more direct way for the European Central Bank (ECB) to provide advanced retail payment features as enablers for intermediaries. Certainly, this requires clear governance to not compete with the private sector.

Allow strong privacy for low-value proximity payments, independent of technical connectivity

Strong privacy should be a key differentiator of the digital euro. The legislative proposal of the European Commission already includes strong privacy for offline payments. We think this can also be provided for online payments, assuming that proximity and the payment amount are the determining factors. By allowing strong privacy for a significantly larger volume of cash-like payment transactions a higher adoption rate is very likely, and it would allow for immediate detection of a potential double spend and counterfeiting.

Include a centrally governed distributed ledger as an enabler for digital processes, virtual worlds, and tokenized economies

The selection of technologies for the digital euro components is of major importance. A high focus needs to be on non-functional aspects, like strong privacy and security, quantum-safe encryption, resiliency, and scalability. The digital euro, in particular the settlement component, needs to address interoperability with the traditional world, but equally important with digital processes and virtual worlds as well as with tokenized economies.

We believe that distributed ledger technologies (DLTs) address these needs the best, combined with zero-knowledge proofs to achieve strong privacy.

The deployment of the digital euro system should be distributed, but governance can be centralized and hence is in line with objectives outlined by the European Commission and ECB. IBM’s implementations demonstrate that high performance and scalability requirements could be reached with such a DLT implementation. Future requirements to provide interoperability for cross-currency payments with other retail CBDCs add to the importance of DLT.

Build the digital euro system by starting with a minimum viable digital euro within a sandbox

Building the digital euro system has many complexity drivers, such as cultural differences, large existing intermediary landscape, preparation for the next-gen payments infrastructure across Europe, security and business resilience, privacy, and relevant regulations and legal frameworks in general. Systems with such high complexity are best built with incremental and agile approaches with end-to-end learning cycles.

The first productive version is then usually best built as a minimum viable product (MVP), in this case, the minimum viable digital euro. A go-live will then include only minimal but differentiating functionality in order to get early learnings from actual build and production experiences. Finally, a minimum viable digital euro could be launched within a sandbox, where, for instance, the number of countries and transaction volumes are significantly limited.

To read more, access IBM Consulting’s recently published Implementation of the Digital Euro whitepaper here.

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