The IIF has published a staff note as an update on the work of the digital euro scheme's Rulebook Development Group (RDG). This note summarizes a recent update report published by the European Central Bank, identifies some areas of potential concern, and identifies areas where the report is to be commended. The briefing note also highlights some of the key points of a recent thought-provoking Copenhagen Economics study on the digital euro's potential impacts on financial stability, innovation and competition, and consumer welfare.

The update report provides useful information regarding the status of the digital euro rulebook drafting process. It clarifies some important technical points, while leaving other important points open. There are also points of concern, including the non-public nature of the drafting process, potential cybersecurity and liability issues around the role of NCBs, and the potential for deanonymization of end user data by the Eurosystem. There is also much to commend, including the additional clarity that such updates provide, and the expressed intention to leverage existing standards. We trust that points of concern will be addressed by the RDG and/or the ECB during the remainder of the preparation phase.

The IIF addressed the digital euro project in its September 18, 2023 IIF staff assessment of digital euro proposal, in which IIF staff concluded that the legislative package for the digital euro as released by the European Commission only partly addressed concerns the IIF had previously identified, and did not address concerns around governance and conflicts of interest. The staff assessment also judged the European Commission’s cost benefit analysis presented in the legislative packages as “somewhat basic and high-level,” and mainly relying on previous studies. In this regard, it is helpful to see a recent Copenhagen Economics paper partly fill this gap. The key findings from that paper are that the digital euro can realistically lead to an outflow of up to 739 billion euro of bank deposits in the euro area, and would lead to reduction of credit and an increase in consumer costs; that the case for claimed positive effects of a digital euro on consumer welfare is weak; and that the digital euro will create a set of additional launch and recurring costs for commercial banks, other PSPs, and merchants in general – costs that “will at least partly be passed on to consumers in the form of higher prices of goods and services”. The IIF would also urge the ECB and other official sector actors to redouble efforts to meaningfully grapple with plausible impact scenarios around a digital euro in a rigorously quantitative way.

IIF is currently assessing the recent report out from the Bank of England following its review of the submissions to its consultative report on a digital pound. We will share this assessment once completed.