The European Central Bank said on Wednesday it was ready to pay 1.3 billion euros to private sector partners to help develop a digital version of the euro. The shortlisted institutions will be tasked with more than just developing an application for the digital euro. The ECB said the institutions will also provide offline payment solutions and manage fraud.
The ECB said it would seek partners for five separate programmes.
Among them, the development of offline payments has the highest budget of 662 million euros, followed by risk and fraud management with a budget of 237 million euros.
"Developing a wallet requires different expertise than developing an offline back-end solution," said Jonas Gross, chairman of the Digital Euro Association and chief operating officer of crypto payments company Etonec.
The ECB's move appears to be an important step in efforts to emulate physical cash in the world's top trading bloc with a $19 trillion economy.
While many are not optimistic about the legality of a digital euro, supporters hope the project will provide Europeans with a homegrown payments system and strengthen the euro zone's financial infrastructure.
To be sure, the ECB said in its announcement that it "does not commit to initiating any of the developments listed."
Still, Wednesday's announcement came as a surprise given that European Central Bank President Christine Lagarde said in October that developing a central bank digital currency, or CBDC, would take two years.
As for what types of companies may participate in bidding for contracts, Gross expects mature CBDC technology providers with offline capabilities to seize the opportunity.
Global financial advisory firms, large technology companies and smaller specialty software companies may also apply.
"I would also imagine that for such an important project, the big CBDC software companies that people haven't noticed yet would be ready to apply," Gross said.
In September 2022, the European Central Bank selected five partners to develop a central bank digital currency prototype. The choice signals the ECB's preference for "established players with long-term track records," including Amazon.com Inc., which is responsible for developing e-commerce payments.
MEPs have criticized Amazon's reputation as "questionable" after the US tech giant evaded European data protection regulations and paid an $887 million fine in 2021.
Other selected partners include Spanish lender CaixaBank and French international payment services company Worldline.
The prototyping phase has been completed, but there is no guarantee that the same companies will participate in the future.
The digital euro has been rife with controversy and conspiracy theories since the European Central Bank launched its investigation in 2021. Lagarde's decision in October to enter the preparation phase marked the end of her investigation into CBDC, while lawmakers and investors remain wary of the project. Privacy is a top concern. Many consumers want to avoid a "Big Brother" situation where central banks are able to track their consumption digitally through CBDCs.
The European Commission released a proposal for a digital euro on Wednesday, promising that the digital euro "is not a Big Brother project." To allay concerns, the European Central Bank said it would not have access to personal data. The data will remain with commercial banks, which will be required to host the digital euro. Policymakers also don’t understand why a digital euro would be useful when competing with other digital payment methods.
However, ECB leaders and EU officials said a digital euro could strengthen the financial sovereignty of the euro zone, which includes Germany, France, Italy, Spain and 15 other countries. U.S. payment giants such as Visa and Mastercard dominate the market. The thinking is that a digital euro might hand the reins back to European players.
Meanwhile, policymakers are working to lay the legal foundation for a CBDC. In the European Parliament, digital euro legislation is led by centre-right MP Stefan Berger, who was appointed to lead parliamentary negotiations on a digital euro.
Berger is a German lawmaker and chief negotiator for Europe’s landmark Markets in Crypto-Assets regulation, or MiCA, which is due to partially come into effect in mid-2024.
The European Central Bank has assured policymakers that it will not make a final decision on whether to launch a digital euro until legislation is completed.