Dr. (Annelieke) Anne Marieke Mooij, Tilburg University

The European Central Bank (ECB) is preparing to introduce a digital euro, a central bank digital currency (CBDC). The ECB has explored several design options, ranging from restricted access for financial institutions to broad accessibility for all consumers via national central banks. While a final design hasn’t been chosen, the ECB’s statements suggest a preference for broader accessibility. This blog post will examine the primary legal hurdles associated with each design option.

The ECB’s authority to issue legal tender stems from Article 128 of the Treaty on the Functioning of the European Union (TFEU), granting it exclusive rights to issue banknotes. While secondary law designates physical money like banknotes and coins as legal tender, some legal experts believe a broader interpretation of Article 128 TFEU is possible. They argue that the evolving financial landscape and the absence of a digital legal tender prohibition in the treaty could permit the ECB to issue digital banknotes under this article.

Article 128 TFEU also raises a design question: Can the digital euro accrue interest? While some experts argue that a digital euro should mirror cash and not accumulate interest, a recent Court of Justice of the European Union (CJEU) ruling suggests digital money might not need to strictly resemble cash. In Dietrich & Häring v. Rundfunk, the CJEU defined legal tender using three criteria: mandatory acceptance, acceptance at face value, and debt discharge capability. Notably, the court did not address interest accumulation. Furthermore, the CJEU acknowledged the ECB’s authority extends beyond executing monetary policy to include a regulatory aspect, potentially encompassing the design of legal tender. This interpretation suggests the ECB might be able to introduce an interest-bearing digital euro as legal tender.

The issue of interest rates is crucial when examining potential monetary policy applications. One concern highlighted by the ECB is the potential impact of foreign currencies and cryptocurrencies on its monetary policy transmission channels. The ECB’s control over monetary policy relies on the euro’s dominance. If other CBDCs or cryptocurrencies gain significant traction within the Eurozone, the ECB’s influence could be diminished. However, a digital euro could safeguard the euro’s standing and maintain the singularity of monetary policy within the Eurozone. Economists also question the ability of cryptocurrencies, unlike CBDCs, to provide price stability, a primary objective of the ECB as stated in Article 127(1) TFEU. Therefore, implementing a digital euro to curb cryptocurrency adoption would align with the ECB’s monetary goals. Furthermore, a digital euro could provide a more direct method of monetary policy implementation. Currently, the ECB influences interest rates in the real economy through the rates it charges commercial banks. A digital euro would allow the ECB to directly adjust interest rates on consumer accounts. To ensure efficient monetary policy transmission, the digital euro should be account-based and interest-bearing, meaning consumers would have individual digital euro accounts with the ECB, potentially accessible via the commercial sector, but representing a claim against the ECB or their respective national central bank. While a design restricting digital euro access to financial institutions poses limited legal challenges, an account-based design raises more complex legal questions, particularly regarding potential competition with commercial bank accounts.

For the ECB to introduce the digital euro within its monetary policy framework, it must adhere to its mandate as defined in Article 127 TFEU. This mandate requires measures to have a monetary objective and comply with the principle of proportionality. The CJEU has emphasized the policy’s aim as the primary determinant of its classification as monetary or economic. In Gauweiler, the CJEU confirmed that safeguarding the euro’s status aligns with the ECB’s monetary objectives. The account-based, interest-bearing design of the digital euro seeks to establish new monetary policy transmission channels. The ECB could directly modify interest rates on consumer accounts through the digital euro. While not identical to restoring existing transmission channels, this approach doesn’t render the design unlawful. The CJEU, in Gauweiler, asserted that “safeguarding an appropriate transmission of monetary policy” falls within the scope of monetary policy. The court refers to the “transmission of monetary policy” rather than individual channels. Given evidence suggesting the ECB’s current monetary policy transmission is not as effective as previously thought, the digital euro could improve transmission and address concerns related to the lower bound. Therefore, the digital euro’s introduction should be considered as serving a monetary rather than economic purpose. Even with a monetary objective, the digital euro must still satisfy the principle of proportionality.

The CJEU, in Gauweiler and Weiss, evaluates the proportionality of an ECB measure by assessing its suitability and necessity. Regarding suitability, cryptocurrencies have not yet been widely adopted as a payment method, although the technology has the potential to support such mechanisms shortly. Consequently, economists view the introduction of a CBDC as a logical evolution of monetary policy. While the market impact of CBDCs remains a subject of debate, the CJEU has granted the ECB considerable leeway in implementing appropriate measures. The CJEU’s review focuses on whether the ECB has made a “manifest error in judgment,” which appears unlikely in the context of a digital euro.

This leads to the question of necessity. To fulfill this criterion, the digital euro must not exceed what is required. Assessing necessity depends on the ECB’s objective: (1) promoting the euro as the sole currency against commercial and foreign currencies, or (2) establishing a more direct monetary policy transmission mechanism. The first objective alone wouldn’t justify an account-based, interest-bearing system. The appeal of commercial currencies lies in their affordability and speed. The potential for rapid settlement through a digital euro doesn’t necessitate interest rates. Similarly, cryptocurrencies do not accrue interest, making commercial euro accounts continuously attractive. For international payments, an exchange mechanism utilizing both the digital euro and cryptocurrencies should be considered. It is improbable that a single cryptocurrency will completely replace the euro in physical transactions within the Eurozone. Consequently, a demand for a single currency in physical stores and restaurants will persist. International payments, however, are likely to utilize cryptocurrencies. An exchange mechanism could bridge the gap between euros and cryptocurrencies, ensuring the relevance of both. Incorporating a more direct monetary transmission channel necessitates the account-based system with interest rates. Without individual accounts, applying individual interest rates to consumers is impossible. These interest rates are crucial for transmitting monetary impulses. However, the specific interest rate level remains undecided, and the potential impact of a digital euro’s interest rate on commercial banks needs careful consideration.

Economists hold differing views on the effects of CBDCs on the commercial banking sector. Some predict limited CBDC adoption, minimizing the impact on commercial banks. Others argue that the ECB’s (perceived) stability will give it a competitive advantage, potentially squeezing out the private sector. It seems improbable that the CJEU would deem a digital euro that undermines the commercial sector as necessary. The digital euro’s design should foster competition. A competitive environment encourages technological advancement and provides consumers with choices. A digital euro that weakens the banking industry limits consumer options, harming both consumers and the open market.

In conclusion, introducing a digital euro appears legally feasible. However, several questions remain unanswered. The interest rates applicable to the digital euro are still uncertain. Additionally, this analysis focused on a tiered digital euro system, with consumer access facilitated through market infrastructure. An alternative model involves a CBDC directly accessible via national central banks. This system is presented as a solution for financially excluded individuals without bank accounts. However, the number of such individuals within the EU is relatively small. Therefore, promoting financial inclusion as an objective is primarily socio-economic rather than monetary.

Establishing a digital euro directly accessible through national central banks for economic objectives is also permissible under EU law. While Article 127 TFEU primarily tasks the ECB with maintaining price stability, it also mandates the ECB to “support the general economic policies in the Union.” The scope of this secondary, economic mandate is not yet fully defined due to the absence of relevant case law. However, promoting economic inclusion appears consistent with the Union’s objectives. Article 153(j) TFEU includes social inclusion, encompassing socio-economic inclusion, as an objective. The ECB’s economic mandate, however, refers to “support.” Currently, no law or policy grants the ECB the authority to introduce a CBDC, and it is improbable that such a measure will be introduced.

Currently, access to bank accounts is governed by Directive 2014/92. This directive focuses on fostering competition within the EU to improve access to bank accounts. A centralized approach, using CBDC, to reduce the number of unbanked individuals would represent a complete reversal. The Dutch Central Bank (DNB) has indicated significant potential consumer uptake of a CBDC. Research by the DNB suggests 49% of consumers would open a CBDC account, with 54% willing to deposit funds given comparable interest rates. These findings were observed when CBDCs were a relatively unknown concept (April 2021). As CBDCs become more widely available and understood, adoption rates are expected to increase. Such levels of adoption could jeopardize the viability of the commercial banking sector. Commercial banks rely on consumer deposits to function, utilizing these deposits for loans and investments. Without consumer deposits, commercial banks would struggle to survive. Consequently, a centralized CBDC is unlikely to comply with competition law.

While consumers may soon have access to a digital euro, it is improbable that we will be banking directly with national central banks. A more plausible scenario involves the ECB opting for a tiered system where access to the digital euro is provided through market-based solutions.

For a more in-depth analysis by the author, please click here.

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