Digital euro and privacy: what does the EU say?

Brussels proposes the legal pillars to ensure the acceptance of the digital euro and its coexistence with cash. Commercial banks will be in charge of distributing and limiting the amounts of this digital currency. But will they respect the privacy and anonymity of citizens?

The European Commission and the European Central Bank have presented a package of legislative proposals to convince the European Parliament and the EU Council to support the launch of the digital euro. The European authorities justify the need for CBDC because an increasing number of people – 55% according to their surveys – prefer to pay by electronic means.

They are a set of measures to provide an alternative and complementary payment method to cash for citizens and businesses. The European Central Bank would decide who can use the digital euro, and how it will be used internationally, while commercial banks would be in charge of distributing and limiting the amounts of this new digital currency.

On the one hand, they are intended to ensure that euro cash will continue to be accessible and widely accepted by all individuals and businesses throughout the eurozone and, on the other hand, it sets the legal framework for a possible digital euro as a complement to euro banknotes and coins, which will be compulsorily accepted in shops in the eurozone, “except among small traders who choose not to accept digital payments”.

Reassuring banks and the public

According to EU authorities, the proposals on the table would allow citizens to store up to €3,000 in secure wallets that will guarantee privacy. “Having a digital euro wallet reloaded on your phone – or other devices – will be the same as having coins and notes in your pocket. You will be able to pay just as easily. You won’t even need an internet connection.” said Dombrovskis, Executive Vice-President of the Commission during the press conference, and added that “the amount would be subject to a maximum limit as a way to protect financial stability and avoid substantial outflows of money from banks”.

In this context, the protection of privacy is one of the main concerns of MEPs, consumer associations and citizens who left comments during the public consultation period on the draft. The Commission Vice-President says that we should not worry about our privacy and data protection, that “personal data would be fully protected. Banks, not even the ECB, would not see or be able to track people’s personal data or details. Offline payments would offer a similar level of privacy as cash does today.

This, however, is a contentious point between proponents and critics of these legislative measures. While enabling offline payments for small amounts, in which the payer’s and payee’s details are not recorded, may guarantee a certain level of privacy, technology allows for reconstructing these transactions if required by the relevant authorities.

Similarly, the anonymity offered by cash transactions cannot be guaranteed. As President of the European Central Bank, Christine Lagarde admitted, “Total anonymity – such as that offered by cash – does not seem a viable option. It would contradict other public policy objectives, such as ensuring compliance with anti-money laundering rules and combating the financing of terrorism. And it would also make it virtually impossible to limit the use of the digital euro as an investment vehicle”.

Centralisation vs. decentralisation

Although the digital euro could help reduce the shadow economy and the risk of fraud thanks to full traceability over most transactions, governments would have unprecedented control over our money. This would allow them to know exactly how we spend it and give them the ability to stop payments or confiscate it, as we saw happen with the truckers’ protests against the Canadian government.

In this context, cryptocurrencies offer an alternative to centralised state-controlled banking, democratising the creation of currency while diluting the traditional banking monopoly. Moreover, in practical terms, the introduction of CBDCs still needs to be fully understood by a citizenry that, in fact, already conducts digital banking and commerce transactions on a daily basis through existing payment methods.

And it is precisely at this point, where the alleged need to introduce a new payment method, or even more importantly, the concepts of privacy, anonymity and freedom that we now have with physical money and cryptocurrencies may be decisive in determining whether the proposal for a digital euro is nothing short of a solution in search of a problem – at least as far as the interests of citizens are concerned – that is destined to fail unless it is imposed by force.

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