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Within the Single Currency Package, the first proposed regulation regarding the Digital Euro was recently published, paving the way for a new era of payments and financial transactions. This initiative by the European Central Bank (ECB) aims to introduce a digital version of the euro that can coexist with the traditional currency and offer new opportunities for users. 

The Digital Euro proposal presents nine key elements that provide an overview of the main features and potential implications of this digital currency.

The first element to highlight concerns "liability": the digital euro will be a direct responsibility of the central bank. This means that digital euro holders will be assured that their money is guaranteed directly by the ECB, reducing the risks associated with traditional banking counterparties.

Second, the Digital Euro will be legal tender, meaning that it should be accepted as a means of payment in all contexts where the traditional euro is allowed. However, there may be some exceptions for small merchants who may be exempted from accepting the Digital Euro as a form of payment.

Distribution of the Digital Euro will be through Payments Service Providers (PSPs) and credit institutions. Lenders offering payment accounts will be obliged to provide the Digital Euro to their customers, while PSPs will be able to choose whether or not to offer it.

An interesting aspect is the compatibility and interoperability of the Digital Euro with the EUDI Wallet. This digital wallet could be used to verify the identity of users and handle Digital Euro payments. This could facilitate the adoption of Digital Euro and simplify transactions for users.

Regarding fees, there are no fees for transactions between consumers, but fees could be charged to merchants or in transactions between PSPs. This could incentivize consumer adoption, as there would be no additional fees for using Digital Euro.

The ECB will have to define limits to prevent excessive use of the Digital Euro as a store of value. This means that the Digital Euro should be used primarily as a means of payment and not as a long-term investment. This measure could avoid distortions in the economy and ensure proper management of the digital currency.

Another interesting feature is the ability to use Digital Euro offline. This means that Digital Euro holders will be able to make payments even in the absence of an Internet connection. This feature could be useful in situations where connectivity is limited or absent.

Regarding privacy, Digital Euro will not require transaction data for offline payments. This could ensure a certain level of privacy and anonymity for users using the Digital Euro in offline mode.

Finally, although the Digital Euro will not be a programmable currency, the proposal encourages PSPs to offer innovative services that address payment programmability and compatibility with new paradigms such as Web3. This indicates a willingness to adapt and leverage new and emerging technologies to enhance the digital payments experience.

Considering all these key elements, the Digital Euro could have a promising future. Its status as a central bank liability and legal tender should give users confidence and encourage adoption. However, success will also depend on factors such as effective technical implementation, security, and ease of use.

Competition with other instruments, such as the central bank digital currencies (CBDCs) of other nations or currencies issued by the private sector, will be a determining factor in the success of the Digital Euro. However, the proposal seems to take this potential challenge into account, opening up the possibility of adaptation and innovation to remain competitive in the digital financial landscape.

Whether the Digital Euro will succeed in establishing itself as a widely accepted and used form of payment remains to be seen. It may initially find a niche of limited use, but if the key features and benefits of the Digital Euro are widely recognized, it could gain momentum over time.

ARTICLE WRITTEN BY DEGRASSI&PARTNERS