Dr. (Annelieke) Anne Marieke Mooij, Tilburg University
The ECB has decided to launch the preparation phase for the digital euro. The digital euro is a digital currency (euro) issued by the ECB, a so called ‘Central Bank Digital Currency’ (CBDC). The ECB has currently evaluated different design options for the digital euro in its report. The designs vary from a limited form, only accessible to financial institutions. It could, however, also be designed to be accessible to all consumers via their national central banks. The ECB has not yet settled on a single design but the launch statement makes it unlikely that the ECB will opt for a digital euro only accessible by financial institutions. The different designs carry different legal obstacles. This blog will consider the main legal hurdles.
The power for the ECB to issue legal tender is founded in Article 128 TFEU, which provides the ECB with the exclusive power to issue banknotes. These are the only banknotes to carry legal tender. Secondary law refers to physical money such as banknotes and coins as carrying the status of legal tender. However, Grunewald et. al. consider that a purposive reading of Article 128 TFEU allows for a broader interpretation of this provision. The most convincing argument here is the change of financial systems. The possibility of digital legal tender was not expressly provided for because it was not yet a viable option when the Lisbon Treaty was adopted. Moreover, the Treaties do not provide any grounds for prohibiting the creation of digital legal tender. Therefore, it does not seem impossible that the ECB could issue digital banknotes based upon Article 128 TFEU.
Article 128 TFEU further raises a question of design, more specically can the digital euro accumulate interest? Grunewald et. al. conclude that digital notes should resemble cash, in the sense that no interest should be accumulated. The recent judgment of the CJEU in Dietrich & Häring v. Rundfunk, however, indicates that digital money under EU law may not have to resemble cash. Dietrich & Häring v. Rundfunk concerned the status of the cash money as legal tender. The CJEU considered that the “concept of ‘monetary policy’ is not limited to its operational implementation […] but also entails a regulatory dimension intended to guarantee the status of the euro as the single currency […]” (para 38). The Court furthermore argued that legal tender carries three criteria: mandatory acceptance, acceptance at full face value and the power to discharge debts (paras 48-49). Interestingly, the criterion on whether or not a currency accumulates interest – called ‘storage of value’ – is neither clarified by secondary legislation nor in the case law of the CJEU. Additionally, as the CJEU stated, the ECB’s authority is not limited to executing monetary policy but also includes a regulatory dimension (para 38). This regulatory dimension should be interpreted to include the design of legal tender, without violating the three primary criteria. Following the Court’s judgment in Dietrich & Häring v. Rundfunk, it seems likely that the ECB could introduce the digital euro as legal tender and include the use of interest rates.
The question of interest rates is particularly important when considering the potential use of the monetary policy. The first concern described by the ECB in their report is that of potential foreign currencies, i.e. other CBDCs and cryptocurrencies (see p. 9). If these currencies took hold in the Eurozone they could limit the transmission channels of the ECB. The ECB’s transmission of monetary policy depends on the euro as the dominant currency. If foreign CBDCs or commercial currencies such as Bitcoin became more prominent than the euro the ECB would not be able to influence monetary policy. A digital euro, however, could safeguard the status of the euro and the singleness of monetary policy in the Eurozone. Furthermore, economists doubt whether cryptocurrencies, as opposed to CBDCS, can provide price stability. As per Article 127(1) TFEU price stability is the primary objective of the ECB. To use a digital euro to prevent cryptocurrencies takingover would prevent the instability of cryptocurrencies. Such an objective is within the ECB’s monetary aim. Furthermore, the digital euro could provide a more direct transmission of monetary impulses. Currently the ECB influences interest rates in the real economy through the rates it charges commercial banks when they borrow from the ECB. Through a digital euro the ECB could directly change interest on the consumer accounts. To ensure the transmission of monetary impulses, the digital euro should be account-based and carry interest. Meaning that consumers would have access individual digital euro accounts with the ECB. Such accounts can be accessible through the commercial sector but consumers would have a claim upon the ECB or their national central bank. A design whereby the digital euro is only available to financial institutions carries limited legal questions. The account-based design, however, becomes more legally challenging. In such a system the digital euro might compete with commercial bank accounts.
It is clear that for the ECB to introduce the digital euro as part of its monetary policy, the ECB would have to comply with its monetary mandate established in Article 127 TFEU. According to the ECB’s monetary mandate under Article 127 TFEU, a measure must have a monetary aim and comply with the principle of proportionality. In Gauweiler, the CJEU considered the aim of the policy as the primary indicator of whether a policy is monetary or economic (para 46). In Weiss, the CJEU furthermore placed very few limits on the indirect effects of the ECB’s adopted policy. According to the CJEU in Gauweiler, the aim of safeguarding the status of the euro complies with the monetary aim of the ECB (para 48). The account-based and interest carrying design of the digital euro aims to introduce new transmission channels. The ECB will be able to directly change interest rates on consumer accounts through the digital euro. Whilst not being the same as restoring the available transmission channels, it does not render the design of a digital euro unlawful. The CJEU stated in Gauweiler that the “[…] objective of safeguarding an appropriate transmission of monetary policy […]” falls within the scope of monetary policy (para 49). The CJEU speaks of “transmission of monetary policy” rather than individual channels (para 49). There is clear evidence that current monetary policy transmission of the ECB? is not as effective as previously thought. The digital euro could improve transmission and reduce the concerns about the lower bound. The introduction of a digital euro should be considered as pursuing a monetary rather than economic aim. Even if fulfilling the monetary aim, the digital euro would still comply with the principle of proportionality.
The CJEU in Gauweiler and Weiss reviews the proportionality of an ECB measure by examining the suitability and necessity of said measure (para 72). Regarding the suitability criterion, it should be noted that, at present, cryptocurrencies have never been implemented as a large-scale payment mechanism. The technology is, however, capable of facilitating such mechanisms in the near future. Economists, therefore, argue that the introduction of a CBDC is a natural progression of monetary policy. Whilst the effect of CBDCs on the markets is still debated, the ECB has been given a wide margin of discretion by the CJEU in adopting suitable measures. It is clear that the CJEU will only review whether the ECB has not made ‘a manifest error in judgment’ (Gauweiler, para 74). It seems unlikely that the Court would find the latter for the introduction of a digital euro.
This leaves the question of necessity. To comply with this second criterion, the digital euro may not go beyond what is necessary. The evaluation of this criterion depends on the aim that is pursued by the ECB: (1) the promotion of the euro as a single currency in light of commercial and foreign currencies, or (2) a more direct transmission of monetary policy. The first aim by itself would not justify the introduction of account-based and interest-bearing accounts. Commercial currencies are attractive because of their cheap and fast payment option. The potential for quick settlement through a digital euro does not require interest rates. Nor do cryptocurrencies accumulate interest rates, hence commercial euro accounts will remain attractive. Regarding international payments a mechanism of exchange using the digital euro and cryptocurrency should be considered. It is unlikely one cryptocurrency will take over the eurozone’s physical market. Meaning there will still be demand for a single currency in shops and restaurants. International payments are likely to be conducted with cryptocurrencies. An exchange mechanism can bridge the gap between euro’s and cryptocurrencies. Safeguarding the importance of both. If one includes the introduction of a more direct transmission channel, the account-based system with interest rates would be necessary. Without individual accounts consumers cannot gather individual interest rates. The interest rates are necessary to transmit monetary impulses. This, however, does not yet settle the interest rate level that can be charged. In particular, the impact of the potential interest rate of a digital euro on commercial banks should be considered.
Economists disagree on the impact of CBDC on the commercial sector. Some argue that the uptake of CBDC will be limited. The introduction of CBDC will thus not have a large effect on the commercial sector. Whilst others argue that the ECB will have a competitive advantage due to their (perceived) stability, and thus the possibility for competition from the private sector is significantly decreased. It would therefore seem unlikely that the CJEU would qualify a digital euro which diminishes the commercial sector as necessary. The design of the digital euro should therefore allow the commercial sector to compete. The potential for competition stimulates technological growth and allows for consumer choice. A digital euro that diminishes the banking industry would reduce consumer options. This would not be beneficial to either consumers or the open market.
Based on the analysis above, the introduction of a digital euro thus seems legally possible. However, some questions remain. The interests that could be charged on the digital euro are not yet certain. Additionally, this post only considered a digital euro in a tiered system whereby consumer access would be realized through market infrastructer. The second option is a form of CBDC that is directly accessible through the national central banks. This system is considered a solution to the unbanked, i.e. consumers without a bank account. However, the number of such unbanked consumers in the EU is low. The aim of providing an inclusive banking sector is thus a primarily socio-economic rather than a monetary goal.
The economic objective of creating a digital euro which is directly accessible through national central banks is also not unlawful under EU law. In addition to its primary price stability mandate under Article 127 TFEU, this same Article states that the ECB also “shall support the general economic policies in the Union”. The scope of this secondary, economic mandate is not yet clear as there is no caselaw on this topic. However, it seems that the aim of economic inclusion fits the objectives of the Union. Article 153(j) TFEU includes the aim of social inclusion, which includes socio-economic inclusion. The economic mandate of the ECB, however, speaks of “support”. At present, no law or policy provides the authority for the ECB to introduce CBDC. It is furthermore unlikely that such a measure will be introduced.
At present access to a bank account is provided through Directive 2014/92. This directive focusses on increased competition within the EU to promote access to bankaccounts. A centralized approach to reduce the number of unbanked, through CBDC would require a 180 degree turn. The Dutch Central Bank (DNB) furthermore discovered there would be significant consumer uptake of CBDC. The DNB report states that 49% of consumers would open a CBDC account and, with an equal level of interests, 54% of consumer would deposit more than zero euro. This research was conducted when the concept of CBDC is relatively unknown (April 2021). When a CBDC becomes available and more known, the uptake should increase even further. The viability of the commercial sector would be in danger with such levels of uptake. The commercial banks require deposits from consumers to function. The deposits are used to provide loans and investments. Without consumer deposits the commercial banks would cease to exist. It is therefore unlikely that a centralized CBDC would comply with competition law.
Whilst consumers could be using a digital euro in the near future, it is unlikely that we will be banking with our national central banks. More likely the ECB will opt for a tiered-system whereby access to the digital euro is provided through market solutions.
For an extended analysis by the author click here.
Barnard & Peers: chapter 18
Photo credit: DXR, via Wikicommons media