Digital Euro: Functionality of the new digital cash will focus on effortless consumer use
The European Central Bank has taken noteworthy steps toward introducing a digital euro. After outlining the needed functionality, the bank is now looking for development partners to bring the new currency to life – highlighting offline use, user-friendliness, and security.
Central bank digital currencies would modernize financial systems globally. As public digital money is yet to exist, they would be a public response to the rise of private money transactions.
While several central banks worldwide have begun exploring the potential of digital capital, the European Central Bank (ECB) has taken a head start. Currently seeking vendors for a digital euro, its goal is to find a trusted roster of operators for frame agreements. Although the central bank has yet to commit to launching any work, the budget allocations shed light on the ins and outs of the upcoming project.
The central bank is looking for partners for:
- Offline services
- Risk and fraud management
- App and software development
- Alias lookup
- Payment data security
Offline functionality is at the core of the digital euro
The ECB has reserved the largest bit of the digital euro budget – over half of its 1.1 billion euro allocation – for offline functionality. Although digital currencies are often associated with online use, the ECB promises that all digital euro transactions could be completed without internet access. Offline functionality is prominent for the currency’s usability, supporting the EU’s vision of building a true alternative for cash.
Furthermore, the ECB’s focus on offline payments reflects an up-to-date understanding of the evolving financial landscape. While digital currencies are gaining ground, there’s a growing need to adapt to changing user preferences, abilities, and circumstances.
EU-level data would support risk and fraud management
Risk and fraud management has the second-largest focus within the digital euro functionality. The ECB plans to build a central fraud detection and prevention mechanism to help payment service providers (PSP) spot anomalies and patterns.
The central system would be capable of, e.g., scoring transaction risks in real time and producing fraud statistics and intelligence reports.
The general system would combine data from payment service providers across the EU. However, it would not replace the PSPs’ individual fraud prevention, risk management, and detection rules.
Digital euro app would provide easy access for consumers
The central bank plans to build its own digital euro app. While the application’s primary goal would be to equip consumers with an easy, accessible avenue to digital euros, it would also provide a systematic appearance and user experience for the new currency. For PSPs, the app would provide cost-effective distribution.
In addition to the app, the EU has allocated funds to create a Software Development Kit (SDK). The planned SDK supports all payment service providers adding digital euro services to their existing consumer channels, including their respective apps and online services.
Aliases ease transactions
Aliases are a familiar concept to any private virtual currency owners. In short, they allow users to make transactions using, e.g., phone numbers or email addresses, thus eliminating the need to remember lengthy account or wallet numbers or knowing the recipient’s bank details.
The ECB has included aliases in the digital euro scope to enforce acceptance, enhance user-friendliness, and facilitate peer-to-peer transactions. Aliases have many advantages, though – they also reduce fraud risks and require less data.
Cash-like data privacy
The ECB promises that a digital euro would entail cash-like privacy. The bank has promised that payment information from digital euro transactions could not be used to identify users. In other words, EU regulation for the central-bank-governed digital currency would ensure a new level of privacy compared to other virtual currencies in the market.
The secure exchange of payment information in the new currency is based on tokenization. As we mentioned in our article on digital euro benefits, the EU has outlined that the currency will be designed in a manner that minimizes the amount of personal data processing by service providers or the central bank itself.
Vendor selection seals the success of the digital euro
The selection of service providers to build the infrastructure for the digital euro is a crucial decision that can significantly impact the initiative’s success and public perception. This is especially true, as the ECB’s has made partner choices that have caused scrutiny in the past.
In 2022, the ECB was criticized by EU lawmakers for selecting the U.S. tech giant Amazon to create an e-commerce prototype for the digital euro. The decision raised concerns about data privacy, security, and the potential influence of non-European entities in developing critical financial infrastructure.
As the ECB embarks on the next phase of developing services around the digital euro, the question of who will be chosen to execute these tasks becomes paramount. The institution must carefully navigate this decision to address past criticisms and ensure that the chosen partners align with the principles and goals of the project.
Read more: Main benefits of the digital euro comprise plunging payment costs and increased security
Read more: Digital euro risks include threats to financial stability and costs for commercial players
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Sources
European Central Bank: What would a digital euro be?
Digital euro: Risk and fraud management component
European Central Bank: Calls for applications for digital euro component providers
Digital euro: App and SDK component
European Central Bank shows it’s serious about enabling digital euro offline use
Digital euro: Secure exchange of information component
Digital euro: Alias lookup component
ECB issues digital euro vendor call for up to €1.1 billion in contracts
