The EU will define the legal foundations of a digital euro

By Huw Jones

LONDON (Reuters) – The European Union is due to publish draft rules on Wednesday giving the legal underpinnings for a digital euro, should the European Central Bank decide to issue one in coming years.

Central banks around the world, from China and Japan to Brazil to Britain and Canada, are exploring digital versions of their currencies to prevent a gap in faster payments from being filled by the private sector as the use of cash declines.

“This brings into play the desirable balance between central bank money and private digital means of payment,” according to a draft proposal from the European Commission seen by Reuters.

The European Central Bank is expected to decide in October whether to proceed with a digital euro for retail uses like payments from around 2026 at the earliest, to accompany cash. Before you can do that, however, the digital currency must have legal backing in the EU to back up its acceptance and use.

The draft EU proposal, which could see changes before publication, says the benefits of a digital euro would outweigh the costs and the cost of not issuing one could potentially be very high.

A digital version of the euro zone’s single currency would be “legal tender”, meaning it would have to be accepted as a form of payment, the draft says.

It would support a stronger, faster and more competitive retail payments market, have a high level of privacy, but would not be “programmable”, meaning its use is limited to specific goods or services, the proposal says. .

It would initially only be accessible to people living in the euro zone and to visitors.

Credit rating agency Moody’s said in May that a digital euro would reduce Europe’s dependence on non-European payment companies such as US duo Mastercard and Visa, a long-standing strategic wish EU policy makers.

Banks fear being sidelined if people shift their deposits, a key source of funding, into digital euros.

The draft rules give the ECB the power to limit the amount of money that individuals could store digitally, with a cap of 3,000 to 4,000 euros already mentioned.

The proposal would need the support of EU states and the European Parliament to become law, with changes usually made during the approval process.

(Reporting by Huw Jones; Editing by Hugh Lawson)

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