CMS Hungary Partner Katalin Horvath and CMS Austria Partner Stefan Paulmayer discuss the implications of central bank digital currencies (CBDCs) and the evolving landscape of digital payments in Europe.
CEELM: To start, what is a central bank digital currency and how does it differ from other virtual currencies?
Paulmayer: The general idea is that the countries’ central banks – or the ECB in the eurozone – are contemplating the introduction of a substitute for cash – in the EU the Digital Euro – allowing the transfer of funds from a bank account to a CBDC wallet or account through, e.g., an app. Such digital cash can be used to make payments for things like coffee, sales of goods, and other expenses.
CEELM: How close are we to making this a reality?
Paulmayer: In the EU, the project has been in the preparatory phase since November 2023. This stage involves evaluating the technical implementation and regulatory aspects. Ultimately, Member States will need to decide to implement the Digital Euro. If everything proceeds smoothly, the earliest we can expect it is around 2028.
Horvath: Some countries outside the EU are already using CBDCs. The first – the Sand Dollar – was launched in the Bahamas in 2019. Several countries are in the testing phase, such as the US, Canada, and Switzerland. In fact, 11 countries have already implemented them. Many others are in the research or testing phase, including nations in the Asia-Pacific region like Japan, Malaysia, and Australia, each at varying stages of development. In the EU, based on the draft regulation on the establishment of the Digital Euro, the Digital Euro will be a retail, indirect, account-based CBDC with the status of legal tender.
CEELM: Considering the case studies, why is this topic important, and what would be its selling point?
Horvath: It depends on whether it’s a retail or wholesale CBDC. Retail CBDCs are designed for the public and are used for daily transactions, such as C2C, B2B, B2C, or C2B payments. Wholesale CBDCs, on the other hand, are used for interbank transactions or securities transactions, similar to the existing processes banks have been using for years. In both cases, I believe it can enhance financial inclusion, improve the safety of cross-border payments, and ensure financial stability. This is particularly beneficial for countries where online payment methods are not widely used or where the population has limited access to such methods.
Paulmayer: In the Euro area, there was growing concern about digital currencies, their deregulation, and the volatility of cryptocurrencies like Bitcoin, which are seen more as investment instruments than actual currencies or currency substitutes. The EU also aims to become more independent from the financial markets of other countries. For instance, if the US government sanctions a country, it can suddenly become impossible for other parts of the world to process payments with that country because payment institutions are influenced by the US government.
Additionally, there is an issue of fees. In the case of bankcard payments, for customers, there doesn’t appear to be any cost involved, but for merchants, there is always a fee to pay to the international card schemes, especially for cross-border transactions, which can become expensive. Using a CBDC wallet for transactions could reduce or eliminate these fees, making it cheaper. However, it is still unclear if merchants would effectively pass on these savings to the consumers.
Horvath: I think there will be a cost associated with storing CBDC, such as digital euros, it won’t be free. Consumers will need to have an account with a payment service provider to use digital euros, and merchants will also need to open such accounts. Both consumers and merchants will incur fees, not for transactions, but for maintaining these accounts. While the Digital Euro draft regulation includes provisions on fees, they cannot be higher than those for existing bank accounts.
CEELM: What do you believe public opinion will be regarding the adoption of the Digital Euro?
Horvath: I see the retail Digital Euro as just another electronic payment method. There are several types of electronic payments, such as online bankcard payments, POS, softPOS, and the euro instant payment method. For example, in Hungary, the majority of the public is not very well-educated about digital payments, and trust in digital wallets and digital payments is limited. Additionally, paying with cash has historically been associated with anonymity, and creating a CBDC even if it is account-based or token-based, indirect or direct, can’t guarantee the same level of anonymity
Paulmayer: I agree that public acceptance will be a major challenge. We already have digital wallet solutions and other smartphone payment options, and I wouldn’t want to go through the hassle of opening a CBDC/Digital Euro wallet or account, manually transferring funds, and then making payments. I also think there will be resistance. This concern is often based on misconceptions about data protection, but there’s still significant opposition among the general public, which is likely to be just one of many hurdles.
CEELM: Looking ahead, what do you expect to be the main hurdles in terms of adopting CBDCs?
Paulmayer: There are numerous technical challenges to address, including who will operate the wallets, how they will be structured, and how we will integrate them with smartphones. These are significant tasks for the central banks to resolve. Following that, if a roadmap is established, eurozone governments will need to decide whether to adopt the Digital Euro, which may pose an even bigger hurdle than the technical issues. It’s also essential to gain government support, especially given the potential for substantial public backlash.
Horvath: There are also cybersecurity concerns, as we can’t rule out potential attacks on the entire CBDC system. Additionally, there may be challenges related to AML in the context of the Digital Euro and CBDCs. I’m curious to see how they will address these issues in practice, especially together with the European digital identity wallet eIDAS 2.0 regulation which must be able to store the Digital Euro. Another issue is that a few member states are developing their own digital identity wallets, like in Hungary. This could lead to multiple wallets operating in parallel and competing for storage of CBDC. If an EU member state wants to develop its own wallet, it must align with the technical solutions of the Digital Euro.
CEELM: Speaking of identity wallets, are those closer to being implemented?
Horvath: The development of the Hungarian digital identity wallet has already been finished. The Hungarian government opted not to engage with the broader European digital identity wallet concept when creating its own wallet solution. While we are not part of the eurozone, I can envision a scenario where the government decides to join the eurozone while maintaining its own independent wallet. It will be interesting to see what happens when a non-eurozone country seeks to join.
Paulmayer: In Austria, we already have a digital app provided by the Austrian government that includes a digital ID and driver’s license. I believe this is preparatory work for the broader implementation of the EU ID wallet project. While it currently functions on a national level in Austria and isn’t yet recognized by foreign authorities, the long-term goal is to achieve synchronization and recognition across the EU.
Similar to that, I believe, CBDCs are going to be adopted, it’s just a matter of when, as this will influence adoption rates. If we implement it effectively and conveniently, it might stand a chance of being embraced by consumers.
This article was originally published in Issue 11.7 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
