- The Institute of International Finance (IIF) criticizes the proposed legislation on the digital euro by the European Commission for lacking in six crucial aspects.
- The areas of concern include financial stability mechanisms, cost recovery for payment service providers, and undefined privacy controls.
As blockchain technology continues to shape modern financial systems, the need for well-crafted legislation has never been more crucial. A recent update from the Institute of International Finance (IIF) casts a discerning eye on the European Commission’s attempts to legislate the digital euro, citing several inadequacies in the proposed framework. Our view on this update closely aligns with the commentary from Cointelegraph.
Financial Stability Mechanism Underwhelming
The IIF, a global financial advocacy organization, analyzed the proposed legislation introduced in June and expressed concern over the mechanisms set for ensuring financial stability and bank intermediation. The holding limits, a significant part of this mechanism, remain unspecified, making it unclear how they would be enforced, IIF pointed out.
“The suggested mechanism for financial stability in the bill is vague, leaving a cloud of uncertainty around enforcement of holding limits,” the report stated.
The legislation also seems to gloss over the potential financial strain on payment service providers (PSPs). Implementing digital euro services, from infrastructure connection to wallet software development, comes at a cost. However, with caps on fees and the requirement for credit institutions to provide basic digital euro services for free, the ability for PSPs to recover these costs appears to be in jeopardy. One of the respondents from IIF emphasized,
“The economic model challenges posed by this legislation are significant, particularly around cost recovery for PSPs.”
Privacy Controls and Governance Lacking Definition
Amidst the evolving digital landscape, privacy controls are paramount. Yet, the proposed legislation leaves these controls undefined. It’s unclear what steps PSPs need to undertake to comply with privacy requirements, raising concerns over the feasibility of compliance at the digital euro’s launch. Moreover, the governance structure as proposed leaves much to be desired. The European Central Bank (ECB), tasked with supervising banks and managing the digital euro, could find itself in conflicting roles without independent oversight. This lack of clarity extends to Anti-Money Laundering and cybersecurity measures, which are yet to be established.
The IIF was also vocal about the lack of focus on interoperability, stating,
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“A Central Bank Digital Currency (CBDC) should operate on platforms where other digital currencies are hosted to avoid recreating parallel systems that could be resource-intensive.”
The legislation is developing alongside the infrastructure for the digital euro, which is currently in the investigative phase set to continue through October. The forthcoming steps involve testing technical and business solutions, although a live digital euro is contingent on the passing of the legislation.