10.6092/issn.2531-6133/16907
The European Central Bank (E.C.B.) anticipates including a holding limit of about e3,000 per user within the design of its potential retail central bank digital currency for the Eurozone, the digital euro. This is principally motivated by concerns regarding compliance with regulations related to anti-money laundering and countering the financing of terrorism and the disintermediation of banks as credit intermediaries. This paper argues that these concerns are unwarranted, and, in any case, the holding limit would not be an effective solution to these concerns. The digital euro could be introduced with unlimited holdings by individual users in conformity with E.U. law and while maintaining banks as credit intermediaries in the Eurozone financial system.
application/pdf
2531-6133
16907
1
en
Mark Warren
https://creativecommons.org/licenses/by/4.0
University of Bologna Law Review
Banking
Let the Digital Euro Circulate: Introducing a Retail C.B.D.C. in the Eurozone With Unlimited Holdings by Users 
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Articles & Essays
2023-05-08
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2023-05-08
2023-06-05
1-42
UBLR
Mark Warren
2023/05/08
10.6092/issn.2531-6133/16907
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Let the Digital Euro Circulate: Introducing a Retail C.B.D.C. in the Eurozone With Unlimited Holdings by Users 
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8
llVOLUME 8                                    llISSUE 1                          ARTICLES & ESSAYS



                            UNIVERSITY OF BOLOGNA LAW REVIEW
                           https://doi.org/10.6092/issn.2531‐6133/16907

           Received: 30 September 2022 | Accepted: 20 Oct. 2022 | Published: 8 May 2023

                                                    A

 Let the Digital Euro Circulate: Introducing a Retail C.B.D.C. in
            the Eurozone With Unlimited Holdings by Users


                                           MARK WARREN

Mark Warren is currently a PhD/SJD candidate in Legal Studies at Central European University,
Vienna(Austria). He recently concluded studying the LLM Law & Finance at the University of
Amsterdam (the Netherlands), graduating cum laude. As a solicitor qualified in English law, he
has previously worked in international corporate law firms in London, Hong Kong, Hamburg and
Amsterdam, where he specialised in finance transactions.
This paper was originally written as a master’s thesis for the LLM Law & Finance course at the
University of Amsterdam (the Netherlands) submitted in June 2022. Thanks to my supervisor
Hossein Nabilou and fellow student Jules Vos, participants at the 2022 annual conference of the
Italian Society of Law and Economics (14-16 December 2022 at LUMSA University, Italy) and two
anonymous referees for their comments and suggestions.

 @ warren_mark@phd.ceu.edu
  ID
       0009-0009-2822-7905


                                               ABSTRACT

The European Central Bank (E.C.B.) anticipates including a holding limit of about e3,000 per user
within the design of its potential retail central bank digital currency for the Eurozone, the digital
euro. This is principally motivated by concerns regarding compliance with regulations related to
anti-money laundering and countering the financing of terrorism and the disintermediation of
banks as credit intermediaries. This paper argues that these concerns are unwarranted, and, in
any case, the holding limit would not be an effective solution to these concerns. The digital euro
could be introduced with unlimited holdings by individual users in conformity with E.U. law and
while maintaining banks as credit intermediaries in the Eurozone financial system.


                                              KEYWORDS
              Central Bank Digital Currency; Digital Euro; Disintermediation; Money; Banking




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 LET THE DIGITAL EURO CIRCULATE: INTRODUCING A RETAIL C.B.D.C. IN THE EUROZONE WITH
                           UNLIMITED HOLDINGS BY USERS


                                        TABLE OF CONTENTS

Introduction . . . . . . . . . . . . . . . . . . . . .    .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .    3
1. Literature Review . . . . . . . . . . . . . . . . .    .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .    5
2. Design Options for C.B.D.C.s . . . . . . . . . . . .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .    7
3. The Legal Basis for Digital Euro . . . . . . . . . .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   10
         3.1. Legal Basis Under the Treaties . . . . .    .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   10
         3.2. Legal Influence on the Potential Design     .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   14
         3.3. Further Grounds for Challenge . . . .       .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   16
         3.4. Amendment of the Treaties . . . . . .       .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   18
         3.5. Legal Implementation . . . . . . . . .      .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   18
         3.6. Bringing Legal Actions . . . . . . . . .    .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   19
4. Anonymity: Benefit or Burden? . . . . . . . . . .      .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   20
         4.1. The Importance of Anonymity . . . . .       .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   20
         4.2. Could Anonymity be Acceptable? . . .        .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   23
5. Disintermediation of Banks . . . . . . . . . . . .     .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   25
         5.1. Commercial Bank Money . . . . . . . .       .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   25
         5.2. Migration from Deposits . . . . . . . .     .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   27
         5.3. Adjustments by Banks . . . . . . . . .      .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   28
         5.4. Adoption by Retail Depositors . . . . .     .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   32
         5.5. Bank Runs . . . . . . . . . . . . . . . .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   34
         5.6. Central Bank Refinancing Operations .       .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   35
6. The Purpose of Digital Euro . . . . . . . . . . . .    .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   39
         6.1. Payment System Autonomy . . . . . .         .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   39
         6.2. The Future of Money . . . . . . . . . .     .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   40
Conclusion . . . . . . . . . . . . . . . . . . . . . .    .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   .   41




                                                   2
2023]                          UNIVERSITY OF BOLOGNA LAW REVIEW                                 [Vol. 8:1


     INTRODUCTION

The European Central Bank (E.C.B.) is assessing the viability and the design of a potential
retail Central Bank Digital Currency [hereinafter C.B.D.C.] for the Eurozone, the digital
euro.1 In its Report on a digital euro published in October 2020,2 the E.C.B. outlined
principles and requirements which are to be incorporated in the design of the digital
euro. One requirement limits the digital euro to being a means of payment [hereinafter
M.o.P.] and not “a form of investment” used to hold a large sum of money. This could
entail “limiting the quantity of digital euro that users can hold and/or transact”.3 The
E.C.B. has mooted a limit of e3,000 held by any user (the “holding limit”).4
         The E.C.B. purportedly intends for the introduction of the digital euro to
maintain public access to Central Bank Money [hereinafter Ce.B.M.] as cash usage
declines.5 But the digital euro would not merely offer the digital equivalent of euro
banknotes and coins currently in circulation [hereinafter digital cash] if its features
materially diverge from physical cash. The holding limit is such a divergence. It denies
users the discretion to hold all their money in this form of Ce.B.M. Yet the holding limit
may receive less scrutiny than the other design questions that the E.C.B. has reserved in
its report for further deliberation.
         The concerns that motivate applying the holding limit rest on two bases. Firstly,
the digital euro could facilitate financial transactions linked to criminal activity and be
inconsistent with regulations related to anti-money laundering and countering the
financing of terrorism [hereinafter A.M.L./C.F.T.]. Secondly, the digital euro could reduce
deposits held at Eurozone banks which could lead to both disintermediation of banks as
credit intermediaries and financial instability. This paper considers these concerns and
finds them to be unwarranted. Furthermore, the holding limit does little to address
these concerns while doing much to undermine the utility of the digital euro to its
potential users.
         The holding limit would serve as a blunt instrument towards A.M.L./C.F.T.
Meanwhile, there are other models devised that offer payment anonymity in compliance

1
  The      project     is   currently    in   a   twenty-four-month        “investigation    phase”;    see
  European Central Bank,            Eurosystem Launches Digital Euro Project,           (July 14,    2021),
  https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210714 d99198ea23.en.html.
2
  European Central Bank, REPORT ON DIGITAL EURO (2020), https://www.ecb.europa.eu/pub/pdf/other/ Report
  _on_a_digital_euro 4d7268b458.en.pdf.
3
  Id. at 16–18; see Requirement R8.
4
  See Fabio Panetta, Interview with Financial Times, European Central Bank (June 20, 2021),
  https://www.ecb.europa.eu/press/inter/date/2021/html/ecb.in210620 c8acf4bc2b.en.html.
5
  See Fabio Panetta, The ECB’s Case for Central Bank Digital Currencies, Financial Times (Nov. 18, 2021),
  https://www.ft.com/content/5e588cea-c218-4867-aeb7-e16e198ccd9a.


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 LET THE DIGITAL EURO CIRCULATE: INTRODUCING A RETAIL C.B.D.C. IN THE EUROZONE WITH
                           UNLIMITED HOLDINGS BY USERS


with A.M.L./C.F.T. regulations. Regulators would, however, have to countenance that
lower-value C.B.D.C. transactions remain anonymous – as already occurs for some cash
and electronic money [hereinafter e-money] transactions – to offer C.B.D.C. as an
anonymous electronic means of payment [hereinafter e.M.o.P.]: digital cash.
        This paper finds that the Treaties already provide for the issuance of digital euro,
provided the design reflects a cash-like instrument. This restricts the ability of the E.C.B.
to design a novel instrument that dissuades depositors from withdrawing their deposits
in favour of digital euro – within the political constraint that an amendment of the
Treaties to implement the digital euro is unlikely. The holding limit is not an effective
alternative, however. It would tolerate about one trillion euros of leakage from Eurozone
banks’ balance sheets.
        Importantly, a dynamic analysis of how the E.C.B. and the Eurozone national
central banks [hereinafter N.C.B.s] (together, the “Eurosystem”), banks, depositors,
borrowers and other parties may react to the availability of digital euro would
demonstrate that the holding limit is ill-founded. The potential for further profit would
continue to incentivise banks to lend. Banks can adjust the terms of their relationship
with depositors and borrowers, as well as their funding model. Parties may increase
reliance on the capital markets to facilitate credit intermediation and bank funding,
which would be consistent with the E.U.’s Capital Markets Union ambitions.               The
Eurosystem may be required to embrace its refinancing operations remaining as an
important potential source of bank funding that backstops bank liquidity. Nevertheless,
there is no indication that banks would be unable to operate in a digital euro
environment, that bank runs would pose a greater threat nor the access to credit would
be threatened. The real concern for the E.C.B. should not be how to stop the public from
holding too much digital euro but, rather, convincing the public to hold digital euro at
all.
        The remainder of this paper is organised as follows.          Section 1 provides a
literature review. Section 2 sets out considerations relating to the design of C.B.D.C.s
Section 3 analyses the legal basis for the digital euro and the limitations that E.U. law
imposes on its potential design. Section 4 assesses the feared incompatibility of an
anonymous M.o.P. with A.M.L./C.F.T. regulations. Section 5 assesses the prospect of the
digital euro triggering the disintermediation of banks. Section 6 briefly considers the
potentially wider purpose of the digital euro for the Eurozone. Finally, the last Section
concludes.




                                             4
2023]                            UNIVERSITY OF BOLOGNA LAW REVIEW                                      [Vol. 8:1


      1. LITERATURE REVIEW

The compatibility of the digital euro with the provisions of the Treaties has been
previously assessed.6 Legal uncertainties have been highlighted.7 This paper contributes
to the literature considering the legal basis for the digital euro.
          The optimal design of C.B.D.C.s has been widely discussed.8 Many have modelled
the impact of C.B.D.C.s on banks, albeit based on differing assumptions that make their
findings only partially comparable.9 The potential impact of C.B.D.C.s on the financial



6
  See Benjamin Geva, Seraina Neva Grünewald & Corinne Zellweger-Gutknecht, The e-Banknote as a “Banknote”:
  A Monetary Law Interpreted, 41 Oxford Journal of Legal Studies 1119 (2021); Seraina Neva Grünewald, Corinne
  Zellweger-Gutknecht & Benjamin Geva, Digital Euro and ECB Powers, 58 Common Market Law Review 1029
  (2021); Corinne Zellweger-Gutknecht, Benjamin Geva & Seraina Neva Grünewald, Digital Euro, Monetary
  Objects, and Price Stability: A Legal Analysis, 7 Journal of Financial Regulation 284 (2021).
7
  See, e.g., Hossein Nabilou, Testing the Waters of the Rubicon: the European Central Bank and Central Bank digital
  currencies, 21 Journal of Banking Regulation 299 (2020); Peter Wierts & Harro Boven, Central Bank Digital
  Currency - Objectives, Preconditions and Design Choices, 20–01 De Nederlandsche Bank: Occasional Studies
  (2020),      https://www.dnb.nl/media/c3qgn4lk/202004_nr-_1_-2020-_-_central_bank_digital_currency_-
  _objectives-_preconditions_and_design_choices.pdf.
8
  See, e.g., Itai Agur, Anil Ari & Giovanni Dell’Ariccia, Designing Central Bank Digital
  Currencies, 125 Journal of Monetary Economics 62 (2021); Sarah Allen et al., DESIGN
  CHOICES FOR CENTRAL BANK DIGITAL CURRENCY:                      POLICY AND TECHNICAL CONSIDERATIONS (2020),
  http://prasad.dyson.cornell.edu/doc/Design_Choices_for_CBDC_Final.pdf;                 Bank for International
  Settlements, CENTRAL BANK DIGITAL CURRENCIES: FOUNDATIONAL PRINCIPLES AND CORE FEATURE, (2020),
  https://www.bis.org/publ/othp33.pdf; Michael Bordo & Andrew Levin, Central Bank Digital Currency
  and the Future of Monetary Policy (National Bureau of Economic Research Economics Working Paper
  23711,2017), http://www.nber.org/papers/w23711.pdf; Michael Kumhof & Clare Noone, Central Bank
  Digital Currencies - Design Principles and Balance Sheet Implications (Bank of England, Staff Working
  Paper, 2018), https://www.ssrn.com/abstract=3180713; Jiaqi Li, Predicting the Demand for Central
  Bank Digital Currency: A Structural Analysis with Survey Data (Bank of Canada, Staff Working Paper,
  2021), https://www.bankofcanada.ca/2021/12/staff-working-paper-2021-65/;                     Tommaso Mancini-
  Griffoli et al., Casting Light on Central Bank Digital Currencies, 8 IMF Staff Discussion Notes 1 (2018)
  https://elibrary.imf.org/view/journals/006/2018/008/006.2018.issue-008-en.xml.
9
  See, e.g., David Andolfatto, Assessing the Impact of Central Bank Digital Currency on Private Banks,
  131 The Economic Journal 525 (2021); John Barrdear & Michael Kumhof, The Macroeconomics of
  Central Bank Issued Digital Currencies (S.S.R.N. Electronic Journal, Working Paper No.              605, 2016),
  https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2016/the-macroeconomics-of-
  central-bank-issued-digital-currencies.pdf?la=en&hash=341B602838707E5D6FC26884588C912A721B1DC1;
  Markus K. Brunnermeier & Dirk Niepelt, On the Equivalence of Private and Public Money, 106 Journal
  of Monetary Economics 27 (2019); Jonathan Chiu et al., Bank Market Power and Central Bank Digital
  Currency: Theory and Quantitative Assessment (Bank of Canada, Staff Working Paper, 2019-20, 2019),
  https://www.bankofcanada.ca/wp-content/uploads/2019/05/swp2019-20.pdf; Jesús Fernández-Villaverde
  et al., Central Bank Digital Currency: Central banking for all? (National Bureau of Economic Research,
  Working Paper 26753, 2020), http://www.nber.org/papers/w26753; Todd Keister & Daniel Sanches, Should
  Central Banks Issue Digital Currency? (Federal Reserve Bank of Philadelphia, Working Paper 19-26, 2019),
  https://www.philadelphiafed.org/-/media/frbp/assets/working-papers/2019/wp19-26.pdf; Young Sik
  Kim & Ohik Kwon, Central Bank Digital Currency, Credit Supply, and Financial Stability, Journal of Money, Credit
  and Banking (2022), https://doi.org/10.1111/jmcb.12913; Stephen Williamson, Central Bank Digital Currency:
  Welfare and Policy Implications (Society for Economic Dynamics, Meeting Papers 386, 2019) [hereinafter
  Williamson, Welfare and Policy Implications], https://ideas.repec.org/p/red/sed019/386.html; Stephen D.
  Williamson, Central Bank Digital Currency and Flight to Safety, 142 Journal of Economic Dynamics and Control
  104-146 (2021) [hereinafter Williamson, Flight to safety].


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     LET THE DIGITAL EURO CIRCULATE: INTRODUCING A RETAIL C.B.D.C. IN THE EUROZONE WITH
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system has been surveyed.10 This paper reconciles their conclusions with the Eurozone
financial system and the legal limitations to the potential design of the digital euro.
           This paper considers historical examples that should inform expectations on the
impact of C.B.D.C.s: the Bank of Amsterdam and other European public deposit banks
that began in the seventeenth century;11 the U.S. postal banks;12 the Bank of Canada
assuming banknote-issuing privileges;13 the 2007 bank run on British bank Northern
Rock;14 and proto-C.B.D.C.s in Finland and Ecuador.15 These examples facilitate a more
realistic assessment of the likely impact of the digital euro and the holding limit, rather
than relying solely on economic models and theoretical assumptions.




10
   See, e.g., Bank for International Settlements, CENTRAL BANK DIGITAL CURRENCIES: FINANCIAL STABILITY
   IMPLICATIONS (2021), https://www.bis.org/publ/othp42_fin_stab.pdf; Ulrich Bindseil, Tiered C.B.D.C. and the
   Financial System (European Central Bank, Working Paper Series, 2020) [hereinafter Bindseil, Tiered C.B.D.C],
   https://data.europa.eu/doi/10.2866/134524; Ulrich Bindseil, Central Bank Digital Currency: Financial System
   Implications and Control, 48 INT’L. J. POL. ECON. 303 (2019) [hereinafter Bindseil, Central Bank Digital Currency].
11
   See Jon Frost, Hyun Song Shin & Peter Wierts, An Early Stablecoin? The Bank of Amsterdam and
   the Governance of Money (Bank for International Settlements, BIS Working Papers No. 902, 2020),
   https://www.bis.org/publ/work902.htm; Isabel Schnabel & Hyun Song Shin, Money and Trust: Lessons from
   the 1620s for Money in the Digital Age (Bank for International Settlements, BIS Working Papers No. 698, 2018),
   https://www.bis.org/publ/work698.pdf.
12
   Steven Sprick Schuster, Matthew Jaremski & Elisabeth Ruth Perlman, An Empirical History of the United
   States Postal Savings System (National Bureau of Economic Research Working Papers No. 25812, 2019),
   http://www.nber.org/papers/w25812.
13
   Anna Grodecka-Messi, Private Bank Money vs Central Bank Money: A Historical Lesson for C.B.D.C. Introduction
   (Lund University Publications, Working Papers, 2019), https://lup.lub.lu.se/record/f4ae004e-5cbc-4551-
   9563-0d497589fe3e.
14
   Hyun Song Shin, Reflections on Northern Rock: The Bank Run That Heralded the Global Financial Crisis, 23 J. ECON.
   PERSP., 101 no. 1 (2009).
15
   Andrés Arauz et al., Dinero Electrónico: The Rise and Fall of Ecuador’s Central Bank Digital Currency, 2 LATIN AM. J.
   CENT. BANKING 100030 (2021).


                                                           6
2023]                             UNIVERSITY OF BOLOGNA LAW REVIEW                                       [Vol. 8:1


      2. DESIGN OPTIONS FOR C.B.D.C.S

A C.B.D.C. is a fiat currency issued by a central bank in digital form in place of, or as a
complement to, physical currency.16 The E.C.B. wishes to offer a digital alternative to
cash in the Eurozone.17 The decline in cash usage reflects the greater use of commercial
bank money [hereinafter Co.B.M.], which is held in deposits18 as a store of value and a
M.o.P.19 There is also a concern that the increasing adoption of crypto-assets by the
public could reach a scale that undercuts monetary policy transmission.20 This is despite
the history of the Bank of Amsterdam indicating that stablecoins are not a sustainable
alternative to Ce.B.M. and that such concerns are overblown.21                              Central banks are
investigating the adoption of their own digital currency as a regulated, state-backed
16
   Allen et al., supra note 8; Eswar Prasad, Central Banking in a Digital Age: Stock-Taking and Preliminary
   Thoughts (Hutchins Center on Fiscal & Monetary Policy at Brookings, Working Papers, 2018),
   http://prasad.dyson.cornell.edu/doc/CentralBankingDigitalAge_Brookings.April18.pdf.                    There are
   numerous definitions offered for C.B.D.C., though some only reflect that author’s proposed form
   of C.B.D.C.; see e.g.      Bank for International Settlements, supra note 8; Bank for International
   Settlements, Central Bank Digital Currencies (2018), https://www.bis.org/cpmi/publ/d174.htm;
   Aleksi Grym et al., Central Bank Digital Currency, 5 BoF Economics Review (2017) (Fi.).,
   https://helda.helsinki.fi/bof/bitstream/handle/123456789/14952/BoFER_5_2017.pdf; Kumhof & Noone,
   supra note 8; Mancini-Griffoli et al., supra note 8.
17
   There are “wholesale C.B.D.C.”            projects examining cross-border, cross-currency or securities
   payment settlement among wholesale users; see, e.g., Project Jura:                        Cross-Border Settlement
   Using Wholesale CBDC, BIS Innovation Hub, Projects, BANK FOR INTERNATIONAL SETTLEMENTS (2022),
   https://www.bis.org/about/bisih/topics/cbdc/jura.htm (last visited Jun 21, 2022); The Banque de France has
   Successfully Completed the First Tranche of its Experimentation Programme in Central Bank Digital Currency, Banque
   de France (Dec. 16, 2021), https://www.banque-france.fr/en/communique-de-presse/banque-de-france-
   has-successfully-completed-first-tranche-its-experimentation-programme-central-bank.
18
   Certain institutions also issue e-money; see Directive 2009/110/EC of the European Parliament
   and of the Council of 16 September 2009 on the taking up, pursuit and prudential supervision
   of the business of electronic money institutions amending Directives 2005/60/EC and 2006/48/EC
   and repealing Directive 2000/46/EC, OJ L 267 7 (2009), https://eur-lex.europa.eu/legal-
   content/EN/TXT/?uri=CELEX%3A02009L0110-20180113 (the e-Money Directive).
19
   See, e.g., The Netherlands; see DNB Study: Cash Must Remain Accessible and Available, De Nederlandsche
   Bank (Dec.          17, 2020) (Neth.), https://www.dnb.nl/en/actueel/dnb/older-bulletins/dnbulletin-
   2020/dnb-study-cash-must-remain-accessible-and-available/;              Jurgen Spaanderman,             The Role
   and Future of Cash, 18–2 De Nederlandsche Bank:                      Occasional Studies 12 (2020) (Neth.).,
   https://www.dnb.nl/media/d5lnf32j/web_129212_os_toekomst_contant_geld_eng.pdf.                          This has
   been a long-term trend; see Hanna Jyrkönen, Less Cash on the Counter: Forecasting Finnish Payment
   Preferences (Bank of Finland, Discussion Papers No. 27, 2004) (Fi.)., http://hdl.handle.net/10419/211994;
   Tanai Khiaonarong & David Humphrey, Cash Use Across Countries and the Demand for
   Central Bank Digital Currency (International Monetary Fund, IMF Working Papers, 2019),
   https://www.elibrary.imf.org/configurable/content/journals$002f001$002f2019$002f046$002f001.2019.is
   sue-046-en.xml. See also Sweden; see Niklas Arvidsson et al., Cashless Society: When Will Merchants Stop
   Accepting Cash in Sweden. A Research Model, in ENTERPRISE APPLICATIONS, MARKETS AND SERVICES IN THE FINANCE
   INDUSTRY 105-13 (Stefan Feuerriegel & Dirk Neumann eds., 2017).
20
   See Hossein Nabilou & André Prüm, Central Banks and Regulation of Cryptocurrencies, 39 REVIEW OF BANKING AND
   FINANCIAL LAW 1003 (2020).
21
   See Frost et al., supra note 11. Proposed stablecoin Diem (originally Libra) has already been abandoned by
   its promoter, Meta (formerly Facebook); see Diem Association, Statement by Diem CEO Stuart Levey on the Sale
   of the Diem Group’s Assets to Silvergate, PR Newswire (Jan. 31, 2022), https://www.prnewswire.com/news-
   releases/statement-by-diem-ceo-stuart-levey-on-the-sale-of-the-diem-groups-assets-to-silvergate-
   301471997.html.


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     LET THE DIGITAL EURO CIRCULATE: INTRODUCING A RETAIL C.B.D.C. IN THE EUROZONE WITH
                               UNLIMITED HOLDINGS BY USERS


alternative.22 The digital euro would be the Eurozone’s C.B.D.C. offering Ce.B.M. that
serves as an e.M.o.P. in the Eurozone.23
           Many aspects of the design of C.B.D.C. remain open to consideration24 and entail
trade-offs against other M.o.P.s.25              The design may represent digital cash or adopt
additional features (and reject features of physical cash). Numerous central banks have
been investigating the design choices.26 There is some consensus, including under the
auspices of the Bank for International Settlements27 and the Group of 7.28




22
   See Bank for International Settlements, supra note 8; Bank for International Settlements, supra note 17.
   See also the U.K.; see Bank of England, Bank of England Statement on Central Bank Digital Currency (Apr. 19,
   2021) (U.K.), https://www.bankofengland.co.uk/news/2021/april/bank-of-england-statement-on-central-
   bank-digital-currency. See also the U.S.; see FED. RSRV. SYS., MONEY AND PAYMENTS: THE U.S. DOLLAR IN THE
   AGE OF DIGITAL TRANSFORMATION (2022), https://www.federalreserve.gov/publications/files/money-and-
   payments-20220120.pdf. But concerns remain regarding implementation of C.B.D.C.s; see Andrew Bailey,
   Bank of England Governor Andrew Bailey on the future of cryptocurrencies and stablecoins (Sept. 3, 2020) (UK).,
   https://www.brookings.edu/wp-content/uploads/2020/09/es_20200903_england_bailey_transcript.pdf;
   Ansgar Belke & Edoardo Beretta, From Cash to Central Bank Digital Currencies and Cryptocurrencies: A Balancing
   Act Between Modernity and Monetary Stability, 47 J. ECON. STUD. 911 (2020).
23
   European Central Bank, supra note 2, at 49–51; see Core Principle P2.
24
   See Allen et al., supra note 8; Bindseil, Tiered C.B.D.C, supra note 10; Bindseil, Central Bank Digital Currency,
   supra note 10; Wouter Bossu et al., Legal Aspects of Central Bank Digital Currency: Central Bank and
   Monetary Law Considerations (International Monetary Fund, IMF Working Papers No. 2020/254, 2020),
   https://www.imf.org/en/Publications/WP/Issues/2020/11/20/Legal-Aspects-of-Central-Bank-Digital-
   Currency-Central-Bank-and-Monetary-Law-Considerations-49827; Grym et al., supra note 16.
25
   See Wierts & Boven, supra note 7; Paul Wong & Jesse L. Maniff, Comparing Means of Payment: What Role for a
   Central Bank Digital Currency?, FEDS NOTES (Aug. 13, 2020), https://federalreserve.gov/econres/notes/feds-
   notes/comparing-means-of-payment-what-role-for-a-central-bank-digital-currency-20200813.htm.
26
   For surveys of central bank activity, see Codruta Boar, Henry Holden & Amber Wadsworth,
   Impending arrival: a sequel to the survey on central banking digital currency, 107 BIS PAPERS 1 (2020),
   https://www.bis.org/publ/bppdf/bispap107.pdf; Mancini-Griffoli et al., supra note 8; Prasad, supra
   note 16.
27
   Bank for International Settlements, supra note 8.
28
   G7, G7 Finance Ministers and Central Bank Governors’ Statement on Central Bank Digital
   Currencies (C.B.D.C.s) and Digital Payments – 13 October 2021,                       (Oct.         13,     2021),
   https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/
   1025234/FINAL_G7_Statement_on_Digital_Payments_13.10.21.pdf;
   G7, Public Policy Principles for Retail Central Bank Digital Currencies (C.B.D.C.s), (2021),
   https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/
   1025235/G7_Public_Policy_Principles_for_Retail_CBDC_FINAL.pdf.



                                                         8
2023]                           UNIVERSITY OF BOLOGNA LAW REVIEW                                  [Vol. 8:1


Trends have emerged among C.B.D.C.s that are already in circulation or are undergoing
pilot projects.29 But the E.C.B. continues to experiment and has yet to determine the
likely design of the digital euro.30 The principles and requirements published by the
E.C.B. indicate that the digital euro would involve a two-tier system31 – the Eurosystem
operates a centralised ledger with private sector intermediaries responsible for user
supervision and access – but most features remain undecided.32
          The final proposed design of the digital euro will affect how widely it is adopted by
potential users, as well as the legal and economic analysis of its impact on the Eurozone.33
Nonetheless, the digital euro can be analysed for the purposes of this paper despite this
uncertainty.




29
   See Sand Dollar in the Bahamas; see Central Bank of The Bahamas, Annual Report & Statement of
   Accounts, 2020, (Apr. 26, 2021), https://www.centralbankbahamas.com/viewPDF/documents/2021-05-
   05-14-14-43-2020-CBOB-Annual-Report.pdf; Central Bank of The Bahamas, Annual Report & Statement
   of Accounts, 2021, (Apr. 25, 2022), https://www.centralbankbahamas.com/viewPDF/documents/2022-
   05-05-11-51-31-CBOB-2021-Annual-Report-and-Financial-Statements.pdf. See e-C.N.Y. in China; see
   People’s Bank of China, Progress of Research & Development of E-C.N.Y. in China, (July, 2021) (China).,
   http://www.pbc.gov.cn/en/3688110/3688172/4157443/4293696/2021071614584691871.pdf.                See DCash
   in the Eastern Caribbean; see Eastern Caribbean Central Bank, What You Should Know | E.C.C.B.
   Digital E.C. Currency Pilot, (2022), https://www.eccb-centralbank.org/p/what-you-should-know-1 (last
   visited Jun 21, 2022). See eNaira in Nigeria; see Central Bank of Nigeria, Design Paper for the eNaira,
   (2021), https://enaira.com/download/eNaira_Design_Paper.pdf (last visited Feb 11, 2022).             See e-
   krona in Sweden; see Sveriges Riksbank, E-krona pilot phase 1, (Apr. 2021) [hereinafter Riksbank,
   Phase 1], https://www.riksbank.se/globalassets/media/rapporter/e-krona/2021/e-krona-pilot-phase-
   1.pdf; Sveriges Riksbank, E-krona pilot phase 2, (Apr. 2022) (Swed.) [hereinafter Riksbank, Phase
   2],      https://www.riksbank.se/globalassets/media/rapporter/e-krona/2022/e-krona-pilot-phase-2.pdf
   (last visited Jun 6, 2022); Sveriges Riksbank, The Riksbank’s e-krona project, Report 1, (Sep. 2017)
   (Swed.). [hereinafter Riksbank, Report 1], https://www.riksbank.se/globalassets/media/rapporter/e-
   krona/2017/rapport_ekrona_uppdaterad_170920_eng.pdf;             Sveriges    Riksbank,       The Riksbank’s
   e-krona project, Report 2, (Oct.              2018) (Swed.).         [hereinafter Riksbank, Report 2],
   https://www.riksbank.se/globalassets/media/rapporter/e-krona/2018/the-riksbanks-e-krona-project-
   report-2.pdf. These are non-interest-bearing cash-like instruments, held in C.B.D.C. wallets and managed by
   authorised intermediaries in a two-tier system.
30
   E.g. Transacting C.B.D.C. with hardware as a bearer instrument; see Deutsche Bundesbank, Eurosystem
   Experimentation Regarding a Digital Euro - Research Workstream on Hardware Bearer Instrument, (2021) (Ger.).,
   https://www.ecb.europa.eu/paym/digital_euro/investigation/profuse/shared/files/deexp/ecb.deexp211011
   _2.en.pdf.
31
   European Central Bank, supra note 2, at 36–44.
32
   Although the E.C.B.            confirmed the technical feasibility of the holding limit;                 see
   European Central Bank,           Digital Euro Experimentation Scope and Key Learnings,               (2021),
   https://www.ecb.europa.eu/pub/pdf/other/ecb.digitaleuroscopekeylearnings202107 564d89045e.en.pdf.
33
   Kumhof & Noone, supra note 8; Mancini-Griffoli et al., supra note 8.


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     LET THE DIGITAL EURO CIRCULATE: INTRODUCING A RETAIL C.B.D.C. IN THE EUROZONE WITH
                               UNLIMITED HOLDINGS BY USERS


        3. THE LEGAL BASIS FOR DIGITAL EURO

       3.1. LEGAL BASIS UNDER THE TREATIES

The Treaty on the Functioning of the European Union [hereinafter T.F.E.U.]34 and the
Statute of the European System of Central Banks and of the European Central Bank
[hereinafter E.S.C.B. Statute]35 entrust the Eurosystem with the responsibility for
Eurozone monetary policy within the Economic and Monetary Union [hereinafter
E.M.U.].36 The responsibilities of the Eurosystem, which lacks legal personality, are
coordinated by the E.C.B.37 and implemented by the E.C.B. with the relevant N.C.B.s.38
The digital euro project is, therefore, an Eurosystem project coordinated by the E.C.B.
           The principles of conferral, subsidiarity and proportionality in the Treaty on
European Union [hereinafter T.E.U.]39 determine whether the introduction of the digital
euro is an intra vires act of the Eurosystem.40 Subsidiarity is not applicable due to
Eurozone monetary policy being an exclusive Union competence.41 It is not feasible to
evaluate proportionality without a concrete proposal. This paper, therefore, principally
considers whether the Treaties confer the power on the E.U. (represented by the
Eurosystem) to introduce the digital euro.
           The legal basis for the digital euro lies in the E.C.B. having “the exclusive right to
authorise the issue of euro banknotes within the Union” and the Eurosystem having the
power to “issue such notes”.42 Digital euro that would operate as a digital equivalent of


34
   Consolidated Version of the Treaty on the Functioning of the European Union art.                                  15,
   May 9, 2008, 2008 O.J. (C 115) 47 [hereinafter TFEU], https://eur-lex.europa.eu/legal-
   content/EN/TXT/PDF/?uri=CELEX:12016E/TXT&qid=1640690125551&from=EN.
35
   Consolidated Version of the Treaty on the Functioning of the European Union: Protocol (No. 4) on the Statute
   of the European System of Central Banks and of the European Central Bank, OJ C 202 230 (2016), https://eur-
   lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:12016M/PRO/04&qid=1661254745758&from=EN.
36
   The Treaties refer to the European System of Central Banks [hereinafter E.S.C.B.], consisting of the E.C.B.
   and the E.U. N.C.B.s; see TFEU, supra note 34, at 127; TFEU Protocol No. 4, supra note 35, at 1. However, non-
   Eurozone Member States and their N.C.B.s are exempt from Eurozone decision-making; see TFEU, supra note
   34, at 139; TFEU Protocol No. 4, supra note 35, at 42.
37
   TFEU, supra note 34, at 132(1); TFEU Protocol No. 4, supra note 35, at 9.2.
38
   TFEU Protocol No. 4, supra note 35, at 12.1. On the Eurosystem, see Christos V. Gortsos, The European Central
   Bank, in THE E.U.LAW OF ECONOMIC AND MONETARY UNION (Fabian Amtenbrink, Christoph Hermann & René
   Repasi eds., 2020); Michael Ioannidis, The European Central Bank, in THE E.U.LAW OF ECONOMIC AND MONETARY
   UNION (Fabian Amtenbrink, Christoph Hermann & René Repasi eds., 2020); Bernd Krauskopf & Christine
   Steven, The Institutional Framework of the European System of Central Banks: Legal Issues in the Practice of the First
   Ten Years of its Existence, 46 COM. MAR. L. REV. 1143 (2009).
39
   Consolidated Version of the Treaty on European Union, OJ C 326 13 (2012), https://eur-lex.europa.eu/legal-
   content/EN/TXT/PDF/?uri=CELEX:12008M/TXT&from=EN.
40
   Id. at 5.
41
   TFEU, supra note 34, at 3(1)(c).
42
   Id. at 128(1); TFEU Protocol No. 4, supra note 35, at 16. On issuance of banknotes and coins, see Gortsos, supra
   note 38, at 7.3.


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2023]                           UNIVERSITY OF BOLOGNA LAW REVIEW                                    [Vol. 8:1


cash constitutes money.43 It would serve the three functions of money: medium of
exchange, store of value and unit of account. This status is bolstered by the digital euro
being backed by the state and the central bank and (one would hope) its wide acceptance
as a M.o.P.44 However, there is no E.U. law definition of “banknotes”. Irrespective of the
drafters of the Treaties only contemplating paper banknotes, the Treaties provide no
limitation on the medium of the banknote.45 The concept can, therefore, be extended to
the digital form.46 The Eurosystem is capable of issuing two digital currencies given their
distinguishable forms: the digital euro would be a general-purpose currency; reserves
are intended for interbank payment settlement.
          The Treaties do, however, distinguish between banknotes and coins. Issuance of
coins is reserved for Member States.47 No distinction between banknotes and coins can
exist in digital currency other than any iconography used but the visual representation of
the digital euro carries no legal significance. This provision originates from the historical
role of nation-states in minting coins, and that rationale is not applicable to C.B.D.C.48 It is
then consistent with the Treaties to consider non-minted euro currency as falling within
the “banknote” concept under the T.F.E.U. Article 128(1).49 The digital euro would be the
digital form of the euro “banknote” in accordance with the T.F.E.U. Article 128(1).
          There are limitations to what can constitute money and banknotes when
designing the digital euro. As features are incorporated that go further than being a
digital manifestation of existing paper banknotes, it becomes increasingly unlikely that
such digital euro falls within the T.F.E.U. Article 128(1).50 The E.C.B. has indicated the
same conclusion.51 It would be problematic for the digital euro to have a variable value,
whether for remuneration or monetary policy, or be programmable to restrict its use. A
banknote is a negotiable instrument with a fixed nominal value.52 A balance should be
remunerated with additional money, not the variation of the nominal value of the
instruments held. Similarly, certain features may require a Treaty amendment if they go



43
   Geva et al., supra note 6.
44
   Charles Proctor, Mann on the Legal Aspect of Money (7th ed. 2012).
45
   Cf. A restrictive interpretation could take the word “banknotes” to only denote physical banknotes; see
   Bossu et al., supra note 24.
46
   Geva et al., supra note 6; Grunewald et al., supra note 6; Wierts & Boven, supra note 7; Zellweger-Gutknecht
   et al., supra note 6.
47
   TFEU, supra note 34, at 128(2).
48
   Grunewald et al., supra note 6; Zellweger-Gutknecht et al., supra note 6.
49
   Geva et al., supra note 6; Grunewald et al., supra note 6; Zellweger-Gutknecht et al., supra note 6.
50
   Grunewald et al., supra note 6; Nabilou, supra note 7; Wierts & Boven, supra note 7; Zellweger-Gutknecht et
   al., supra note 6.
51
   European Central Bank, supra note 2, at 24–25.
52
   Bossu et al., supra note 24; Geva et al., supra note 6.


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     LET THE DIGITAL EURO CIRCULATE: INTRODUCING A RETAIL C.B.D.C. IN THE EUROZONE WITH
                               UNLIMITED HOLDINGS BY USERS


beyond existing Eurosystem tools,53 or are tantamount to taxation such as negative
interest charged on digital euro holdings.54
           The Eurosystem is empowered under the Treaties to “provide facilities . . . to
ensure efficient and sound clearing and payment systems”.55 This provides the legal
basis for the Eurosystem to institute a digital euro payment system.56 The Eurosystem
has used this legal basis to drive integration towards a single Eurozone payments
system57 : the euro payment system [hereinafter T.A.R.G.E.T.2.], the euro payment area
[hereinafter S.E.P.A.], payment settlement of securities transactions [T.2.S.], instant
payment settlement [T.I.P.S.] and regulation of card interchange fees.58 There are limits
to the scope of this legal basis.59 Nonetheless, a digital euro payment system relates to
money and comfortably falls within the scope.
           A more spurious argument would be that the E.S.C.B. Statute Article 22 acts as a
legal basis for issuing the digital euro. This would construe the digital euro as a facility
that allows payments to function in the absence of cash.60 Cryptocurrencies, such as
Bitcoin, are sometimes perceived in this dual role as both money and payment systems.61
The regulatory role of the Eurosystem includes acting as a “catalyst” for advancing the
Eurozone payment system.62 Nonetheless, this is not a suitable basis on which to ground
the issuance of the digital euro, provided digital euro represents money.                                 Paper
banknotes do not legally constitute a subset of a Eurosystem payment facility, especially
when the T.F.E.U. Article 128(1) offers an explicit legal basis for the issuance of Ce.B.M.
C.B.D.C. should not be legally construed in such a manner either.
           If the digital euro were to take a more exotic form, those formulations of the
digital euro would require an alternative legal basis to the T.F.E.U. Article 128(1). The
E.S.C.B. Statute Article 22 could become relevant as a legal basis if its primary role was to
53
   Nabilou, supra note 7.
54
   Grunewald et al., supra note 6; Zellweger-Gutknecht et al., supra note 6.
55
   TFEU Protocol No. 4, supra note 35, at 22.
56
   Wierts & Boven, supra note 7.
57
   Phoebus L. Athanassiou, Payment Systems, in The EU Law of Economic and Monetary Union (2020); René Smits,
   The Changing Payments Landscape of Europe: Issues of Regulation and Competition, 27 Yearbook of European Law
   405 (2008); Ivan Parać Vukomanović, New Services Offered within the Remit of Target2 - How Do They Correspond
   with TFEU and Central Bank Tasks?, 3 EU and Comparative Law Issues and Challenges Series 1048 (2019).
58
   Regulation (E.U.)       2015/751 of the European Parliament and of the Council of 29 April
   2015 on interchange fees for card-based payment transactions, OJ L 123 1 (2015),
   http://data.europa.eu/eli/reg/2015/751/oj/eng.
59
   This is an inappropriate basis for regulation of central counterparties in derivatives clearing;
   see Case T‑496/11, United Kingdom of Great Britain and Northern Ireland v.                          European
   Central Bank (E.C.B.), ECLI:EU:T:2015:133 (March 4, 2015), https://eur-lex.europa.eu/legal-
   content/EN/TXT/PDF/?uri=CELEX:62011TJ0496&from=en.
60
   Nabilou, supra note 7.
61
   Mary Donnelly, Payments in the Digital Market: Evaluating the Contribution of Payment Services Directive II, 32
   COMPUT. L. & SEC. REV. 827 (2016).
62
   Athanassiou, supra note 57; Vukomanović, supra note 57.


                                                       12
2023]                               UNIVERSITY OF BOLOGNA LAW REVIEW                                          [Vol. 8:1


settle payments. For example, the instrument may be used merely as a temporary asset
to digitally transmit payments between parties. However, the digital euro would be
closer to a market infrastructure tool than currency in such circumstances. The E.S.C.B.
Statute Article 17 allows the Eurosystem to open bank accounts for “credit institutions,
public entities and other market participants”. This could be interpreted broadly to
allow the public to open bank accounts with the Eurosystem that would hold digital euro
balances.63         Such an interpretation of the term “other market participants” is
unconvincing, especially when read within the context of the E.S.C.B. Statute Chapter
IV.64 In the E.S.C.B. Statute, Article 20 allows the E.C.B. to “decide upon the use of such
other operational methods of monetary control as it sees fit”.                                 But this would be
inappropriate to introduce a measure as significant as a currency that is otherwise
lacking a basis under the Treaties.65 These provisions, therefore, represent a problematic
basis on which to issue a purported digital currency.66 The E.C.B. cites the T.F.E.U. Article
127(2) and the E.S.C.B. Statute Articles 17, 20 or 22 as potential legal bases only if digital
euro takes the form of “variants for limited uses, devoid of general legal tender status”.67
           The validity of the digital euro as conceived by the Eurosystem may rest on an
assessment of its proportionality: such act “should be suitable for attaining the legitimate
objectives pursued by the legislation at issue and should not go beyond what is necessary
to achieve those objectives”.68 The Eurosystem’s primary objective to “maintain price
stability”69 and its enumerated tasks70 are relevant to that assessment. Maintaining the
euro as a stable currency that is readily available to households and businesses offers a
public benefit71 and is necessary for the effective transmission of monetary policy.72 These

63
   This design has been mooted in literature; see, e.g., George Selgin, Central Bank Digital Currency as Potential
   Source of Financial Instability, 41 CATO J. 333 (2021).
64
   Wierts & Boven, supra note 7.
65
   Id.
66
   Annelieke Mooij, Central Bank Digital Currency: A Brief Analysis of Legal Issues Concerning the Introduction of Central
   Bank Digital Currencies, BANKIERI, Oct. 2021, at 13. Zellweger-Gutknecht et al., supra note 6.
67
   European Central Bank, supra note 2, at 24.
68
   Case C-493/17, Proceedings brought by Heinrich Weiss and Others, ECLI:EU:C:2018:1000, 72 (Dec. 11,
   2018), https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:62017CJ0493&from=en. See also
   Case C-62/14, Peter Gauweiler v Deutscher Bundestag, ECLI:EU:C:2015:400, 67 (June 16, 2015), https://eur-
   lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:62014CJ0062&from=en.
69
   European Union, supra note 34, at 127(1); European Union, supra note 35, at 2. See European Central Bank, Two
   per Cent Inflation Target, https://www.ecb.europa.eu/mopo/strategy/pricestab/html/index.en.html (last
   visited June 21, 2022).
70
   European Union, supra note 34, at 127(2); European Union, supra note 35, at 3. This includes monetary policy
   and “the smooth operation of payment systems”.
71
   Grunewald et al, supra note 6; Zellweger-Gutknecht et al., supra note 6. Although the term “public good”
   is often used to describe this benefit, the criteria for that economics term are not necessarily satisfied; see
   Lawrence H. White, Should the State or the Market Provide Digital Currency? CATO 237 (2021).
72
   Athanassiou, supra note 57; Zellweger-Gutknecht et al., supra note 6. See Cases C-422/19 and C-423/19,
   Johannes Dietrich and Norbert Häring v Hessischer Rundfunk, ECLI:EU:C:2021:63, 37–39, 43 (January 26,
   2021), https://eur-lex.europa.eu/legal-content/en/TXT/?uri=CELEX:62019CJ0422.

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considerations may support a determination that the digital euro is a necessary measure
to achieve the Eurosystem’s obligations.
           The standard of review applied by the Court of Justice of the European Union
[hereinafter C.J.E.U.] may be decisive for – and a contentious aspect of – its
proportionality assessment.73 The C.J.E.U. has generally afforded broad discretion to the
E.C.B. when reviewing monetary policy decisions,74 due to the technical nature of its
policy choices and the need to undertake forecasts and complex assessments.75 The
E.C.B.’s proportionality determination when introducing the digital euro would again be
grounded in complex economic assessments and may receive similar deference.
However, the introduction of a C.B.D.C. is such a fundamental undertaking that it may
provoke more robust judicial scrutiny than other E.C.B. acts.76



       3.2. LEGAL INFLUENCE ON THE POTENTIAL DESIGN

In line with the existing payment system, the N.C.B.s are expected to function as the
Eurosystem’s intermediaries and be responsible for the management of the digital euro
in their Member States.             This is consistent with the decentralised mandate of the
Eurosystem under the Treaties: tasks are allocated between the E.C.B. and relevant
N.C.B.s.77 This reflects how euro banknotes are currently issued and allows seigniorage
to continue to be apportioned within the Eurosystem.78                                 This also resembles
T.A.R.G.E.T.2, which operates as a single system but is structured as a combination of the
N.C.B.s’ payment systems.79




73
   On the role of courts in E.M.U. policy, see Daniel Sarmiento & Moritz Hartmann, European Monetary Union and
   the Courts, in The EU Law of Economic and Monetary Union, May 2020, at 526.
74
   Nabilou, supra note 7.
75
   See Peter Gauweiler and Others v Deutscher Bundestag, ECLI:EU:C:2015:400, 68-69, 74-75 (June 16, 2015).
76
   Nabilou, supra note 7.
77
   European Union, supra note 35, at 12.1. See Krauskopf & Steven, supra note 38; Julian Langner,
   ESCB/Eurosystem/National Central Banks, in The EU Law of Economic and Monetary Union, May 2020, at 389.
78
   The E.C.B. and each Eurozone N.C.B. are entitled to the value of a predetermined percentage of euro
   banknotes in circulation; see European Central Bank, Decision of the European Central Bank of 13 December
   2010 on the Issue of Euro Banknotes (recast) (ECB/2010/29), Official Journal of the European Union, Feb.9, 2011,
   at 26, https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:02010D0029(01)-20200201&rid=9
   See also Langner, supra note 77.
79
   Vukomanović, supra note 57.




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2023]                              UNIVERSITY OF BOLOGNA LAW REVIEW                                        [Vol. 8:1


The E.U. regulates the provision of payment services under the Second Payment Services
Directive [hereinafter P.S.D.2].80 The parties wishing to function as a payment service
provider [hereinafter P.S.P.s] for digital euro can expect to be subject to the same rights
and obligations.81 However, access to the N.C.B.s in the existing payment system is
limited to those parties accepted as participants to T.A.R.G.E.T.2. The N.C.B. terms and
conditions of T.A.R.G.E.T.2 essentially limit participant status to the E.C.B., N.C.B.s and
credit institutions - although the Eurosystem has discretion in determining eligibility.82
A similar approach to the digital euro system would maintain non-banks relying on
banks to access the payment system and function as digital euro P.S.P.s.
           The E.C.B. expects the digital euro system to comply with A.M.L./C.F.T.
requirements that apply to the financial system.83 The Fourth Anti-Money Laundering
Directive [hereinafter A.M.L.D.]84 would remain relevant to designing the digital euro
payment system and the operational requirements for intermediaries. This includes
subjecting “obliged entities”85 to customer due diligence requirements [hereinafter
C.D.D.] that apply upon establishing a business relationship and when encountering
large-value payments.86 Derogations exist for low-value e-money transactions.87



80
   European Union, Directive (EU) 2015/2366 of the European Parliament and of the Council of 25 November 2015 on
   Payment Services in the Internal Market, Amending Directives 2002/65/EC, 2009/110/EC and 2013/36/EU and Regulation
   (EU) No 1093/2010, and Repealing Directive 2007/64/EC, Official Journal of the European Union, Dec.12, 2015,
   at 35, https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:02015L2366-20151223&from=EN.
   See Benjamin Geva, Payment Transactions under the E.U. Second Payment Services Directive - An Outsider’s View,
   54 Texas International Law Journal, Dec. 11, 2018, at 211; Gabriella Gimigliano & Marta Božina Beroš,
   Introduction to the Payment Services Directive II: A Commentary, in The Payment Services Directive II, Dec.14,
   2021, at 2.
81
   European Central Bank, supra note 2, at 42.
82
   European Central Bank, Guideline of the European Central Bank of 5 December 2012 on a Trans-
   European Automated Real-time Gross Settlement Express Transfer system (TARGET2) (recast) (ECB/2012/27),
   Official Journal of the European Union, Jan.                 30, 2013, at 1, https://eur-lex.europa.eu/legal-
   content/EN/TXT/PDF/?uri=CELEX:02012O0027-20211121&from=EN For the E.C.B. terms and conditions of
   T.A.R.G.E.T.2, see also European Central Bank, Decision of the European Central Bank of 24 July 2007 concerning the
   terms and conditions of TARGET2-ECB (ECB/2007/7), Official Journal of the European Union, Sep. 8, 2007, at 71,
   https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:02007D0007-20211121&from=EN.
83
   European Central Bank, supra note 2, at 27; see Requirement 10. Other central banks expect the same of their
   potential C.B.D.C.s; see Bank for International Settlements, supra note 8.
84
   European Union, Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the
   Prevention of the Use of the Financial System for the Purposes of Money Laundering or Terrorist Financing, Amending
   Regulation (EU) No 648/2012 of the European Parliament and of the Council, and repealing Directive 2005/60/EC of the
   European Parliament and of the Council and Commission Directive 2006/70/EC, Official Journal of the European
   Union, June 5, 2015, at 73 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A02015L0849-
   20210630.
85
   See Id. at 2 (1).
86
   This includes any occasional transaction worth e15,000 or more, occasional transfer of funds for more than
   e1,000 or cash payment for goods for e10,000 or more (see A.M.L.D. Article 11) – or such lower threshold set
   by that Member State (see A.M.L.D. Article 5).
87
   Anonymous prepaid payment cards are exempt from certain C.D.D. if they store up to e150 and transactions
   are up to e50 (see A.M.L.D. Article 12).


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The Charter of Fundamental Rights [hereinafter the Charter]88 provides the right to
privacy.89 This is a factor to be considered in the design of the digital euro system.90 But
this does not imply that users should expect a right to anonymity. Charter rights can be
restricted by laws that are proportionate to achieving an objective of public interest.91
As is apparent from existing A.M.L./C.F.T. legislation, privacy is not an absolute right.
           However, the E.U. recognises that everyone has the right to the protection of
personal data.92 This would impose General Data Protection Regulation [hereinafter
G.D.P.R.] standards on those parties processing data within the digital euro system.93
Such standards for P.S.P.s and the Eurosystem have already been determined in the
existing payment system.94



       3.3. FURTHER GROUNDS FOR CHALLENGE

The Eurosystem is required to act in accordance with the principle of “an open market
economy with free competition” and “favouring an efficient allocation of resources”.95
This principle is arguably contravened if the digital euro leads to money migrating from
banks to central banks and a greater role of central banks in credit intermediation.96
           This argument is unconvincing. The existing refinancing operations regime
entails the Eurosystem’s funding stimulating private sector lending by Eurozone banks.97
This practice is considered intra vires.                      The consequences of greater reliance on
88
   Charter of Fundamental Rights of the European Union, Oct. 26, 2012, 2012 OJ (C 326/391), https://eur-
   lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:12012P/TXT.
89
   Id. at 7.
90
   Zellweger-Gutknecht et al., supra note 6.
91
   European Union, supra note 88, at 52 (1).
92
   European Union, supra note 34, at 16(1); European Union, supra note 88, at 8. This is supplemented
   by European Union, Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016
   on the protection of natural persons with regard to the processing of personal data and on the free movement of
   such data, and repealing Directive 95/46/EC (General Data Protection Regulation), 2016 OJ (L 119) 1, https://eur-
   lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A02016R0679-20160504.                      (the G.D.P.R.); European
   Union, Regulation (EU) 2018/1725 of the European Parliament and of the Council of 23 October 2018 on the protection
   of natural persons with regard to the processing of personal data by the Union institutions, bodies, offices and agencies
   and on the free movement of such data, and repealing Regulation (EC) No 45/2001 and Decision No 1247/2002/EC, 2018
   OJ (L 295) 39, https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32018R1725&from=EN.
93
   Allen et al., supra note 8.
94
   Nikita Divissenko, Title IV “Rights and Obligations in Relation to the Provision and Use of Payment Services”, Chapter
   4 “Data Protection” (Art, 94), THE PAYMENT SERVICES DIRECTIVE II, Dec.14, 2021, at 179 (Gabriella Gimigliano &
   Marta Božina Beroš eds., 2021).
95
   European Union, supra note 34, at 127 (1); European Union, supra note 35, at 2.
96
   Grunewald et al., supra note 6; Nabilou, supra note 7; Nabilou & Prüm, supra note 20.
97
   See section 5.6. See also Jens van ‘t Klooster, Technocratic Keynesianism: A Paradigm Shift Without Legislative
   Change, NEW POLITICAL ECONOMY, 2022, at 771. Jens van ’t Klooster & Clément Fontan, The Myth of Market
   Neutrality: A Comparative Study of the European Central Bank’s and the Swiss National Bank’s Corporate Security
   Purchases, NEW POLitical ECONomy, 865 (2020).



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 2023]                            UNIVERSITY OF BOLOGNA LAW REVIEW                                    [Vol. 8:1


 refinancing operations should merely factor into the E.C.B. determination of the merits
 of the policy and any proportionality assessment by the C.J.E.U. Furthermore, the
 existing banking system is itself a compromise of free competition. Banks as financial
 intermediaries are exempt from asset segregation rules and rely upon deposit insurance
 to reassure depositors.98           Banks as P.S.P.s have preferential access to the payment
 system.99 A private banking market would continue to function alongside C.B.D.C. but
 under different (perhaps less favourable) monetary conditions.100                           This would not
 amount to there no longer being an “open market economy.” Finally, it is questionable
 whether the T.F.E.U. Article 127(1) itself constitutes a ground to invalidate an otherwise
 intra vires act.101
           The Charter protects the “freedom to conduct a business”.102 A challenge could
 be brought by those whose business is purportedly harmed by the presence of the digital
 euro, such as commercial banks.103
           Nevertheless it is doubtful that the digital euro would contravene this freedom.
 C.J.E.U. case law has borne out that the test would be whether the digital euro would
 “prevent the exercise of banking activities”.104 If banks are permitted to operate, but
 their business model becomes financially untenable, that is not a concern for the
 Charter. Furthermore, given that the digital euro would be grounded in E.U. legislation,
 it could be justified as proportionate to its intended objectives.105




98
    Hossein Nabilou, The Law and Macroeconomics of Custody and Asset Segregation Rules: Defining the Perimeters of
    Crypto-banking, SSRN ELECTRONIC JOURNAL (March 30, 2022).
 99
    Charles M. Kahn & William Roberds, Why pay? An Introduction to Payments Economics, Journal of Financial
    Intermediation, 1 (2009).
100
    See Section 5.3.
101
    Advocate-General Cruz Villalón referred to the T.F.E.U. Article 119, which uses the same phrase,
    as a “general and thus ambiguous” Article; see Case C-62/14, Peter Gauweiler and Others v
    Deutscher Bundestag, ECLI:EU:C:2015:7, 126 (Jan.             14, 2015), https://eur-lex.europa.eu/legal-
    content/EN/TXT/PDF/?uri=CELEX:62014CC0062&from=en.
102
    European Union, supra note 88, at 16.
103
    Grunewald et al., supra note 6.
104
    Case C-686/18, OC and Others v Banca d’Italia and Others, ECLI:EU:C:2020:567, 89 (July 16, 2020), https://eur-
    lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:62018CJ0686&qid=1647625337000&from=EN.
    See also Case C-540/16 UAB ‘Spika’ and Others v Žuvininkystės tarnyba prie Lietuvos Respublikos
    žemės ūkio ministerijos, ECLI:EU:C:2018:565, 38 (July 12, 2018), https://eur-lex.europa.eu/legal-
    content/EN/TXT/PDF/?uri=CELEX:62016CJ0540&from=EN.
105
    European Union, supra note 88, at 52 (1).



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        3.4. AMENDMENT OF THE TREATIES

 If it is determined that the desired design of the digital euro falls outside the existing legal
 bases under the Treaties, amendment of the T.F.E.U. and/or the E.S.C.B Statute would be
 necessary.106 There is currently a lack of political enthusiasm for reopening the Treaties
 under the ordinary revision procedure.107 Simplified revision procedures are available but
 problematic.108 Certain relevant Treaty provisions fall outside their scope. Purporting to
 merely clarify an existing Union competence may be accused of attempting an ultra vires
 increase in Union competences.109 The E.C.B. is, therefore, likely to pursue a form of the
 digital euro that avoids amendment of the Treaties. This paper assumes that the legal basis
 of the digital euro is limited to the existing provisions of the Treaties.



        3.5. LEGAL IMPLEMENTATION

 In implementing the digital euro, the E.U. will have to enact a legal package that
 establishes the currency’s requirements, mandates actions by certain institutions and
 amends existing legislation where appropriate.110 For example, P.S.D.2 and the e-Money
 Directive [e-M.D.] govern the convertibility of money between cash, deposits and
 e-money and should be updated to address the digital euro and the requirements of
 digital euro P.S.P.s.111 Furthermore, each Member State must reconcile the digital euro
 with its national law in relation to private law, bankruptcy law and administrative law.
 E.U. legislation may facilitate harmonisation but cannot codify a one-size-fits-all
 solution.
            Regulations and directives necessary to implement the digital euro constitute
 “measures necessary for the use of the euro as the single currency” and so can be agreed
106
    E.U. Member States and the C.J.E.U. bound themselves to complying with the revision procedures under
    the Treaties; see Reijer Passchier & Maarten Stremler, Unconstitutional Constitutional Amendments in European
    Union Law: Considering the Existence of Substantive Constraints on Treaty Revision, 5 Cambridge Journal of
    International and Comparative Law 337 (2016). See also Case 43-75, Gabriella Defrenne v. Societe
    anonyme belge de navigation aerienne Sabena, ECR 455, 58 (April 8, 1976), https://eur-lex.europa.eu/legal-
    content/EN/TXT/?uri=CELEX%3A61975CJ0043&qid=1647459461544; Case C‑370/12, Thomas Pringle v
    Government of Ireland and Others, ECLI:EU:C:2012:756, 36 (Nov. 27, 2012), https://eur-lex.europa.eu/legal-
    content/EN/TXT/PDF/?uri=CELEX:62012CJ0370&from=en.
107
    European Union, supra note 39, at 48(2).
108
    T.F.E.U. Part Three (T.F.E.U. Articles 26-197) may be amended by Council decision (see T.E.U. Article 48 (6)).
    E.S.C.B. Statute Article 22 may be amended by legislation from the European Parliament and the Council (see
    E.S.C.B. Statute Article 40 (1)).
109
    Steve Peers, The Future of EU Treaty Amendments, 31 Yearbook of European Law 17 (2012); Lucia Serena Rossi,
    A New Revision of the EU Treaties After Lisbon?, in THE EU AFTER LISBON: AMENDING OR COPING WITH THE EXISTING
    TREATIES? 3 (2014).
110
    Panetta, supra note 5.
111
    N. Vandezande, Between Bitcoins and Mobile Payments: Will the European Commission’s New Proposal Provide more
    Legal Certainty?, 22 International Journal of Law and Information Technology, 295 (2014).


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 2023]                           UNIVERSITY OF BOLOGNA LAW REVIEW                                    [Vol. 8:1


 upon by the European Parliament and the Council.112 The E.C.B. anticipates using this
 approach,113 which was taken for the introduction of the euro. The legislation would
 otherwise have to follow the ordinary legislative process.114
           The E.C.B. would play a key role in steering the legislative process related to the
 digital euro. It has the right to be consulted regarding proposed legislation115 and can
 propose legislation by delivering recommendations.116 The E.C.B. can determine the
 technical implementation of the digital euro by issuing: decisions with its desired
 policies; opinions that declare its legal interpretation as to how the Eurosystem may
 operate; regulations of the payment and settlement system;117 and “such measures as are
 necessary” to carry out its tasks.118 The E.C.B. can also bring legal action against any
 N.C.B. that fails to fulfil its legal obligations.119



      3.6. BRINGING LEGAL ACTIONS

 Any E.C.B. acts and E.U. legislation regarding the digital euro would be subject to judicial
 review by the C.J.E.U.120 Member States, the European Parliament, the Council and the
 Commission would have standing to seek judicial review. Under the so-called Plaumann
 test, private applicants, such as individuals and companies, have limited access to
 judicial review.121       Standing to challenge E.U. measures is only available where the
 measure directly concerns the private applicant122 and not simply because measures of
 general application impact that applicant.123

112
    European Union, supra note 34, at 133. See Gortsos, supra note 38; Grunewald et al., supra note 6.
113
    European Central Bank, supra note 2, at 24.
114
    On the role of the E.U. legislative bodies in E.M.U. policy, see THE EU LAW OF ECONOMIC AND MONETARY UNION
    16 - 18 (Fabian Amtenbrink et al. eds., 2020).
115
    European Union, supra note 34, at 127 (4), 133.
116
    Id. at 132 (1); European Union, supra note 35, at 34.1.
117
    TFEU, supra note 34, at 132(1); TFEU Protocol(NO 4), supra note, 35 at 34.1.
118
    TFEU, supra note 34, at 282(4).
119
    TFEU PROTOCOL (NO 4), supra note 35, at 35.6.
120
    TFEU, supra note 34 at 263; TFEU PROTOCOL (NO 4), supra note 35, at 35.1.
121
    Case 25/62 Plaumann & Co. v. Commission of the European Economic Community, ECR 95 (1963),
    https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:61962CJ0025&from=en.
122
    See, e.g., T-323/16 Banco Cooperativo Español, SA v. Single Resolution Board, ECLI:EU:T:2019:822 (2019),
    https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:62016TJ0323&qid=1647383168981&from
    =EN; T-365/16 Portigon AG v.           Single Resolution Board, ECLI:EU:T:2019:824 (2019), https://eur-
    lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:62016TJ0365&qid=1647383168981&from=EN;
    T‑377/16,         T‑645/16     and     T‑809/16       Hypo       Vorarlberg     Bank     v.            Single
    Resolution          Board,         ECLI:EU:T:2019:823          (2019),       https://eur-lex.europa.eu/legal-
    content/EN/TXT/PDF/?uri=CELEX:62016TJ0377&qid=1647383168981&from=EN.
123
    T-492/12 Von Storch and Others v.                  European Central Bank, ECLI:EU:T:2013:702 (2013),
    https://curia.europa.eu/juris/document/document.jsf?text=&docid=146461&pageIndex=0&doclang=DE&
    mode=req&dir=&occ=first&part=1&cid=2738293; confirmed on appeal, C‑64/14 P Von Storch and
    Others v.         European Central Bank, ECLI:EU:C:2015:300 (2015), https://eur-lex.europa.eu/legal-
    content/DE/TXT/HTML/?uri=CELEX:62014CO0064&from=en.
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 However, in practice, private applicants in some Member States have indirect recourse
 to the C.J.E.U. by bringing a claim in national court that is referred to the C.J.E.U. for a
 preliminary ruling (pursuant to the T.F.E.U. Article 267) as to whether the relevant E.U. act
 is ultra vires. The C.J.E.U. has accepted such preliminary references as admissible despite
 evidently being a device by applicants to circumvent the Plaumann test.124 National courts,
 such as the Bundesverfassungsgericht (German Federal Constitutional Court), may then add a
 further check on how cavalier the E.U. – including the C.J.E.U. – may be in its interpretation
 of the Treaties.125 The E.U. can, therefore, reasonably expect a legal challenge to arise.
 When considering its proposed design of the digital euro, the E.C.B. may have to pre-empt
 those legal arguments likely to be raised.




         4. ANONYMITY: BENEFIT OR BURDEN?

        4.1. THE IMPORTANCE OF ANONYMITY

 Cash is a bearer instrument that settles payment instantly and anonymously. Co.B.M.
 transactions leave an electronic record that can be scrutinised by the P.S.P. and the legal
 authorities. Some users are motivated to transact using cash because of its anonymity.126
 However, there are negative consequences to the anonymity of cash. It can facilitate
 crime, including tax evasion and corruption, which carries huge social costs.127
            Some activities that are illegal or considered immoral are not necessarily socially
 harmful, however, and cash is beneficial in facilitating such transactions.128                           This
 distinction is important in countries governed by totalitarian regimes where political
 opposition can constitute illegal activity.129 Access to an anonymous M.o.P. is critical to


124
    Sarmiento & Hartmann, supra note 73. See C‑370/12 Thomas Pringle v Government of Ireland
    and Others, ECLI:EU:C:2012:756, 36 (2012); See C‑370/12 Thomas Pringle v Government of Ireland
    and Others, ECLI:EU:C:2012:756, 38-44 (2012); C-62/14 Peter Gauweiler and Others v Deutscher
    Bundestag, ECLI:EU:C:2015:400, 18-31 (2015); C-493/17 Proceedings brought by Heinrich Weiss and Others,
    ECLI:EU:C:2018:1000, 17-26 (2018).
125
    See Proceedings brought by Heinrich Weiss and Others, BVerfG, 2 BvR 859/15, 2
    BvR 1651/15, 2 BvR 2006/15, 2 BvR 980/16 111, 116, 133, 142–143, 5 May, 2020,
    https://www.bundesverfassungsgericht.de/SharedDocs/Entscheidungen/EN/2020/05/rs20200505_2bvr085
    915en.html. This judgement triggered European Commission infringement proceedings INFR(2021)2114.
126
    See Emanuele Borgonovo et al., Privacy and Money: It Matters, SSRN ELECTRONIC J. (2019); Charles M. Khan ET
    AL., Money is Privacy, 46 INT’L ECON. REV. 377 (2005).
127
    See Kenneth Rogoff, The Curse of Cash, THE MILKEN INSTITUTE REVIEW: A JOURNAL OF ECONOMIC POLICY (Jan. 2019),
    https://www.milkenreview.org/articles/the-curse-of-cash?IssueID=31 (last visited Dec. 28, 2021).
128
    White, supra note 71.
129
    Nabilou, supra note 7.


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 transacting outside of state surveillance and avoiding seizure of assets.130 Although E.U.
 Member States are committed to democratic principles,131 the digital euro can only be
 durable if its design guards against potential misuse upon democratic backsliding in any
 Eurozone Member State. The public would be especially vulnerable if cash availability
 were to eventually be phased out due to C.B.D.C. availability.
           Although the E.U. intends to subject crypto-assets to stricter regulation,132
 crypto-asset transactions and their intermediaries currently receive less A.M.L./C.F.T.
 scrutiny than Co.B.M. transactions. The onus has instead been placed on regulated
 entities that transfer money to crypto-asset intermediaries (i.e., P.S.P.s) or have credit
 exposure to crypto-assets (e.g., banks).133
           However, the prospect of crypto-assets as an anonymous e.M.o.P. widely
 facilitating criminal activity is overstated. Crypto-assets are not widely adopted by the
 public.134         Deterrents include their uncertain legal status, lack of trusted
 intermediaries,135 high transaction fees, slow payment processing, unstable values136
 and limited practicality for “real economy” transactions.137 Importantly, crypto-assets
 are not necessarily anonymous. Bitcoin and Ethereum are pseudonymous and users have
 been traceable.138 Monero and Zcash purport to be anonymous, although this has been




130
    Chris Hayes, Is Bitcoin for Real?          with Joe Weisenthal, https://why-is-this-happening-with-chris-
    hayes.simplecast.com/episodes/joe-weisenthal-zN5ly8kv.
131
    TFEU, supra note 34, at Preamble.
132
    See Proposal for a Regulation of the European Parliament and of the Council on Markets in Crypto-assets, and
    amending Directive (EU) 2019/1937, (2020), https://eur-lex.europa.eu/resource.html?uri=cellar:f69f89bb-fe54-
    11ea-b44f-01aa75ed71a1.0001.02/DOC_1&format=PDF.
133
    Nabilou, supra note 7.
134
    Ten percent of Europeans were invested in crypto-assets in 2021; see Fabio Panetta,
    For a few cryptos more:          the Wild West of crypto finance, European Central Bank (2022),
    https://www.ecb.europa.eu/press/key/date/2022/html/ecb.sp220425 6436006db0.en.html (last visited Jun
    21, 2022).
135
    Consumer protection legislation, such as Directive 2011/83/EU of the European Parliament and of the
    Council of 25 October 2011 on consumer rights, amending Council Directive 93/13/EEC and Directive 1999/44/EC
    of the European Parliament and of the Council and repealing Council Directive 85/577/EEC and Directive 97/7/EC
    of the European Parliament and of the Council, OJ L 304 64 (2011), https://eur-lex.europa.eu/legal-
    content/EN/TXT/?uri=celex%3A32011L0083 (the Consumer Rights Directive) and P.S.D.2, does not apply.
    See Donnelly, supra note 61.
136
    Stablecoins are at risk of a run and breaking their peg; e.g., TerraUSD; see Scott Chipolina,
    Terra crisis fans regulatory concerns over $180bn stablecoin market, Financial Times, May 11, 2022,
    https://www.ft.com/content/48d82c7a-495f-4d5e-a87a-a56bea58e760 (last visited May 12, 2022).
137
    Cf. For use cases for crypto-assets, see Joe Weisenthal, There’s a New Vision for Crypto, and It’s Wildly
    Different From Bitcoin, BloombergQuint (2021), https://www.bloombergquint.com/business/bitcoin-btc-vs-
    ethereum-eth-and-defi-there-s-a-big-difference (last visited Jun 21, 2022). E.g., If crypto-assets are only held
    briefly to execute payment, volatile values are less detrimental.
138
    See, e.g., Wall Street Journal, How The Government Tied One Couple to Billions in Stolen Bitcoin,
    https://www.wsj.com/podcasts/the-journal/how-the-government-tied-one-couple-to-billions-in-stolen-
    bitcoin/ad579c04-a43b-4a95-8872-7665da330135 (last visited Mar 1, 2022).


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 questioned.139 Crypto-asset transactions offer greater privacy than the banking system
 and make transactions harder to trace, but that does not equate to anonymity.
            Demand for many crypto-assets instead derives from speculation that their value
 will grow or yield can be earned via “decentralised finance”. They do not serve as a M.o.P.
 This makes it puzzling that the E.C.B. suggests that C.B.D.C. could function as a substitute
 e.M.o.P. that attracts crypto-asset users in the Eurozone.140 Stablecoins are also desired
 to facilitate crypto-asset transactions.141 Withdrawal into digital euro would have to be
 available on crypto-asset exchanges and cheaper than stablecoins in order to attract users.
            The E.C.B. intends to maintain cash availability alongside the digital euro.142
 Despite cash usage declining in the Eurozone, cash will not necessarily become
 redundant. Many Eurozone consumers and merchants continue to use cash despite its
 expenses and physical limitations,143 the availability of e.M.o.P.s and E.U. regulation of
 card interchange fees.144 The anticipated demise of cash failed to materialise upon the
 emergence of e-money.145                   Users are not necessarily prepared to completely
 dematerialise their money.146 Where digital euro fails to substitute cash suitably, certain
 users will continue to use cash.147 Cash remains in circulation irrespective of alternative
 M.o.P.s because it can offer transaction privacy.148                       Some users prioritise privacy,
 whether from the state, their P.S.P. or their counterparty.149 Privacy was the most
 important design feature among respondents to the E.C.B.’s digital euro consultation.150
139
    Allen et al., supra note 8; Prasad, supra note 16.
140
    Fabio Panetta, Designing a digital euro for the retail payments landscape of tomorrow, European Central
    Bank (2021), https://www.ecb.europa.eu/press/key/date/2021/html/ecb.sp211118 b36013b7c5.en.html
    (last visited Dec 8, 2021).
141
    See Sirio Aramonte, Wenqian Huang & Andreas Schrimpf, DeFi risks and the decentralisation illusion, BIS
    Quarterly Review (2021), https://www.bis.org/publ/qtrpdf/r_qt2112b.htm.
142
    European Central Bank, supra note 2, at 20. The E.C.B. has reaffirmed the importance of maintaining
    cash availability despite the prevalence of eM.o.P.s; see, e.g., Opinion of the European Central Bank
    of 30 December 2019 on limitations to cash payments, 2.7 (2019), https://eur-lex.europa.eu/legal-
    content/EN/TXT/PDF/?uri=CELEX:52019AB0046&from=EN; Opinion of the European Central Bank of 25 May
    2020 on cash limitations concerning postal payments and anti-money laundering measures, 2.1.6 (2020), https://eur-
    lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52020AB0017&qid=1606682444372&from=EN.
143
    See Khiaonarong & Humphrey, supra note 19; Mancini-Griffoli et al., supra note 8; Williamson, Welfare and
    Policy Implications, supra note 9; Williamson, Flight to Safety, supra note 9.
144
    Regulation (E.U.) 2015/751, supra note 58.
145
    Grym et al., supra note 16.
146
    Belke & Beretta, supra note 22.
147
    Borgonovo et al., supra note 126; Grym et al., supra note 16. See, What do Households in Germany
    Think About the Digital Euro? First Results from Surveys and Interviews, Deutsche Bundesbank (2021),
    https://www.bundesbank.de/resource/blob/879312/807018037068359550e1d89a5dc366fe/mL/2021-
    10-digitaler-euro-private-haushalte-data.pdf.
148
    Kahn et al., supra note 126.
149
    Id.
150
    European Central Bank, Eurosystem Report on the Public Consultation on a Digital Euro (2021),
    https://www.ecb.europa.eu/pub/pdf/other/Eurosystem_report_on_the_public_consultation_on_a_digital
    _euro 539fa8cd8d.en.pdf. This is likely due to forty-seven percent of respondents originating from Germany.
    Germany maintains relatively high cash usage, partly due to privacy; see Deutsche Bundesbank, supra note
    147.

                                                          22
 2023]                           UNIVERSITY OF BOLOGNA LAW REVIEW                                    [Vol. 8:1


 It is apparent that some users prioritise other features.151 Nonetheless, the absence of
 anonymity may make the digital euro undesirable to some users.152



      4.2. COULD ANONYMITY BE ACCEPTABLE?

 A.M.L./C.F.T. regulations have not altered the anonymity of cash. Such regulations make
 it more difficult to transact in cash for higher-value transactions and increase the legal
 peril of using cash for criminal activity.153 Designing the digital euro as digital cash would
 combine the anonymity of cash with the ease of electronic payments.154 But it could also
 encourage illicit payments. This raises concerns as to whether such a design is consistent
 with the objectives and the requirements of A.M.L./C.F.T. regulations.
           The Eurosystem requires the design of the digital euro to be consistent with
 A.M.L./C.F.T. requirements, and digital euro P.S.P.s are subject to A.M.L./C.F.T.
 regulations.155      However, although the public does not have a right to anonymous
 C.B.D.C.,156   designing the digital euro with features that reduce its utility as a M.o.P. must
 be weighed against the A.M.L./C.F.T. risks from issuing an anonymous M.o.P. with
 unlimited holdings.
           The holding limit is a design feature intended to assist A.M.L./C.F.T. Preventing
 users from anonymously holding a substantial amount of money hampers money
 laundering. However, it would undermine any anonymity purportedly included in the
 design of the digital euro. It increases the frequency of transferring money between a
 C.B.D.C. wallet and an alternative M.o.P., where the transaction data would likely be
 recorded in the banking system. If a C.B.D.C. wallet must be linked to a personal bank
 account to automatically transfer any excess holdings,157 the users cannot maintain an
 anonymous user identity.              At best, it would represent the digital equivalent of
 withdrawing cash at a cash machine to pay for certain transactions anonymously. This
 would mask the user’s spending activities but leave a record of their withdrawals.
           Yet potential designs have been developed that could allow for anonymous
 C.B.D.C. payments within an A.M.L./C.F.T.-compliant system and without the holding

151
    E.g., Avant Card in Finland offered anonymous e-money yet most consumers preferred debit cards for
    equivalent transactions; see Grym et al., supra note 16.
152
    See Li, supra note 8. Li estimates that, in Canada, low anonymity compared to full anonymity could reduce
    C.B.D.C. demand by six - ten percent.
153
    See Section 3.2.
154
    Such “e-cash” was predicted by Milton Friedman; see Milton Friedman, Milton Friedman Full Interview on Anti-
    Trust and Tech, (1999), https://www.youtube.com/watch?v=mlwxdyLnMXM (last visited Jun. 21, 2022).
155
    See Section 3.2.
156
    See id.
157
    European Central Bank, supra note 32.


                                                       23
      LET THE DIGITAL EURO CIRCULATE: INTRODUCING A RETAIL C.B.D.C. IN THE EUROZONE WITH
                                UNLIMITED HOLDINGS BY USERS


 limit.158     This would entail the use of “zero-knowledge proof ” or “blind signature”
 technology that can verify the pre-conditions for a valid payment instruction and
 execute payment without storing user data.159 If a proposed payment exceeds a given
 higher-value threshold, it would be subjected to C.D.D. in accordance with A.M.L.D. A
 two-tier system would be used for A.M.L./C.F.T. supervision. The viability of this model
 is, of course, subject to the technical feasibility of building such a payment system.160
 Nonetheless, this demonstrates prima facie that a design of the digital euro is conceivable
 and offers users anonymous holdings and transactions while subjecting higher-value
 payments to the same level of scrutiny as currently applies to cash transactions under
 A.M.L.D. In such circumstances, the holding limit is an unnecessary measure to address
 A.M.L./C.F.T. concerns.161
             The E.C.B. is contemplating limited functionality for anonymous digital euro
 payments.162 Legislators and regulators would thus need to tolerate an anonymous
 C.B.D.C. that surrenders oversight of certain data that is currently available for Co.B.M.
 There would be no oversight of how much digital euro is held by any user – being as
 anonymous as their cash holdings.                   Lower-value transactions would be completely
 anonymous – which would comprise most payments made by retail users. P.S.P.s may be
 largely unaffected if they deprioritise ex-ante screening of lower-value transactions,
 whether in digital euro or Co.B.M., given the volume of transactions and lower
 A.M.L./C.F.T. risk involved. The difficulty lies in denying ex-post review of transactions to

158
    See David Chaum,             Christian Grothoff & Thomas Moser,                    How to Issue a Central
    Bank      Digital    Currency     (Swiss      National      Bank,      SNB       Working       Papers,     2021),
    https://www.snb.ch/n/mmr/reference/working_paper_2021_03/source/working_paper_2021_03.n.pdf;
    Jonas Gross et al., Designing a Central Bank Digital Currency with Support for Cash-Like Privacy, SSRN Electronic
    Journal (2021), https://www.ssrn.com/abstract=3891121 (last visited May 8, 2022). For related discussions,
    see also Digital Euro Association, Will Central Bank Digital Currencies Enable Anonymous Payments?, Digital
    Euro Association,https://home.digital-euro-association.de/podcast; Alexander Bechtel, Digital Euro with
    Alexander Bechtel from Deutsche Bank, All Things Digital Assets, https://uie360.podbean.com/page/2/
    (downloaded using PodBean).
159
    Allen et al., supra note 8.
160
    The E.C.B. queries whether any digital transaction would be truly untraceable; see European Central Bank,
    supra note 32. Evidence obtained through illegal interception of transaction data could be declared
    inadmissible under national law as a safeguard; see C-310/16, Criminal proceedings against Petar Dzivev
    and Others, ECLI:EU:C:2019:30, ¶ 36 (2019); C-419/14, WebMindLicenses kft v. Nemzeti Adó- és Vámhivatal
    Kiemelt Adó- és Vám Főigazgatóság, ECLI:EU:C:2015:832, ¶¶ 71, 73 (2015). This paper proceeds under the
    assumption that anonymity is technically feasible.
161
    An anonymous C.B.D.C. wallet tied to a device may see users voluntarily restrict digital euro holdings due to
    fear of theft or loss; see Chaum et al., supra note 158.
162
    European Central Bank, supra note 2, at 27–28. The E.S.C.B. developed a proof of concept involving
    “anonymity vouchers”; see European Central Bank, Exploring Anonymity in Central Bank Digital Currencies,
    (2019), https://www.ecb.europa.eu/paym/intro/publications/pdf/ecb.mipinfocus191217.en.pdf.
    The Eurosystem is experimenting with privacy options; see European Central Bank, The
    Eurosystem’s Analysis of Privacy-Enhancing Techniques in Central Bank Digital Currencies, (2021),
    https://www.ecb.europa.eu/pub/pdf/annex/ecb.sp210414_1_annex 43eee6196e.en.pdf?ed992ba1ebc6915f
    12bf5d57013ae54.


                                                         24
 2023]                            UNIVERSITY OF BOLOGNA LAW REVIEW                                      [Vol. 8:1


 legal authorities because transaction data would not be stored. This already occurs with
 cash transactions but would have to be accepted for digital euro transactions.
           The value of the C.D.D. threshold would become the contentious figure in the
 debate. The reality is that money laundering is unavoidable in our liberal society. As
 restrictions are applied to a given M.o.P., money laundering merely shifts to alternative
 methods, including clandestine schemes.163 It remains cumbersome to launder vast sums
 of money in lower-value transactions. This is why exceptions exist for lower-value card
 payments.164 Anonymous lower-value transactions in digital euro would be consistent.
 However, the E.C.B. has only mooted €70 or €100 as a threshold.165 A threshold that is too
 low removes the anonymity of digital euro in practice. A policy debate is merited here.
 But it is apparent that the absence of anonymity and the presence of the holding limit
 should not be predetermined features of the design of the digital euro in pursuit of
 A.M.L./C.F.T. objectives.




       5. DISINTERMEDIATION OF BANKS

      5.1. COMMERCIAL BANK MONEY

 The role of deposits in money creation and credit intermediation explains why banks are
 fundamental to the Eurozone payment system. Banks are partly funded by depositors.
 Banks are uniquely entitled to hold those deposits for their own account rather than
 segregating depositors’ funds.166 But those funds are not merely redeployed towards
 lending. Banks can create Co.B.M. to lend to borrowers, which immediately represents
 newly-created deposits in the borrower’s bank account.167

163
     E.g., money laundering using marketplaces within computer games for downloadable content; see Mark
    Warren & Karel Nihom, Online Video Gaming: yet Another Front in the Perpetual Battle Against Money Laundering,
    Linklaters (2020), https://www.linklaters.com/en/insights/blogs/sportinglinks/2020/april/online-video-
    gaming-yet-another-front-in-the-perpetual-battle-against-money-laundering (last visited Jun. 21, 2022).
164
    See Section 3.2.; e.g., Avant Card in Finland allowed anonymous payments up to 2000 markka, equal to e336
    (e461 in 2020 money); see David Gerard , Avant Card — a Central Bank Digital Currency From 1990s Finland, Attack
    of the 50 Foot Blockchain (2020), https://davidgerard.co.uk/blockchain/2020/01/25/avant-card-a-central-
    bank-digital-currency-from-1990s-finland/ (last visited Jun. 21, 2022). Avant Cards were capable of being
    used for online payments; see Grym et al., supra note 16.
165
    Panetta, supra note 5.
166
    Nabilou, supra note 98; see also Richard A. Werner, How do Banks Create Money, and why can Other Firms not do
    the Same? An Explanation for the Coexistence of Lending and Deposit-Taking, 36 International Review of Financial
    Analysis 71 (2014).
167
    See Michael McLeay, Amar Radia & Ryland Thomas, Money Creation in the Modern Economy, (2014),
    https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-
    modern-economy.pdf?la=en. Money creation by Eurozone banks has been substantiated by empirical
    research; see Matteo Deleidi & Giuseppe Fontana, Money Creation in the Eurozone: An Empirical Assessment of
    the Endogenous and the Exogenous Money Theories, 31 Review of Political Economy 559 (2019).
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      LET THE DIGITAL EURO CIRCULATE: INTRODUCING A RETAIL C.B.D.C. IN THE EUROZONE WITH
                                UNLIMITED HOLDINGS BY USERS


 Banks are disciplined when creating money, however. Firstly, banks are required to
 settle depositor withdrawals with Ce.B.M. (i.e., cash or reserves).168 A bank will run out
 of Ce.B.M. if it creates money that is deposited with other banks. In such circumstances,
 that bank may have to increase its deposit interest rate to incentivise depositors to
 maintain deposits with that bank. Secondly, created money must be lent to profitable
 investments.169 A bank cannot afford to pay its deposit interest rate without earning a
 higher yield on its lending. Ultimately the bank’s balance sheet will need to balance,
 among other things, depositors’ claims recorded as liabilities against loans (receivables)
 recorded as assets.
            Cheques, cards and bank transfers are premised upon two parties settling
 payment using Co.B.M. and without recourse to cash. If a bank holds a substantial
 proportion of bank accounts in the local economy, once reserves payable between banks
 are netted-off against each other, it requires smaller outflows of reserves between banks.
 Such a reduction in Ce.B.M. outflows – on a stable basis – allows banks to reduce the
 proportion of their assets that need to be held in Ce.B.M. Banks can instead deploy their
 funding towards less liquid and higher-yielding lending rather than maintaining
 lower-yielding Ce.B.M. and government bonds to meet Ce.B.M. outflows. The long-term
 lock-in of capital allows for long-term investment that generally yields higher returns
 for the project and its investors.170 The intensity of this maturity transformation is
 critical to maximising its net interest margin. It is, therefore, no coincidence that banks
 are integral to the payment system and enhance payment technology.171 There is a
 financial incentive for banks to convince depositors to minimise their withdrawals.
 Deposits become more appealing than cash as deposits become more convenient as a
 M.o.P.172
            The introduction of the digital euro would alter this equilibrium in the business
 model for Eurozone banks.                C.B.D.C. offers users an alternative e.M.o.P. to Co.B.M.
 Replacing deposits with wholesale market funding is (typically) more expensive and less
 stable for the bank.173 This reverses the current virtuous circle in banks’ funding that



168
    McLeay, Radia & Thomas, supra note 167; see also George Selgin, Central Banks as Sources of Financial Instability,
    14 Independent Review 485 (2010).
169
    See James Tobin, Commercial Banks as Creators of Money, Cowles Foundation Discussion Paper (1963),
    https://cowles.yale.edu/sites/default/files/files/pub/d01/d0159.pdf (last visited Dec. 30, 2021).
170
    See Giuseppe Dari-Mattiacci et al., The Emergence of the Corporate Form, 33 J.L. ECON. & ORG. 193 (2017).
171
    The primary function of public deposit banks in Europe historically was to provide a payment and clearing
    system offering Co.B.M. as a M.o.P.; see Schnabel & Shin, supra note 11.
172
    Kahn & Roberds, supra note 99.
173
    Barrdear & Kumhof, supra note 9. C.f. Swedish banks receive a lower proportion of their funding from
    deposits than Eurozone banks; see Sveriges Riksbank, supra note 29.


                                                          26
 2023]                           UNIVERSITY OF BOLOGNA LAW REVIEW                                    [Vol. 8:1


 depends upon substitution from Ce.B.M. to Co.B.M.174 It is feared that this would reduce
 bank lending and consequently economic output.175



      5.2. MIGRATION FROM DEPOSITS

 Depositors receive a negligible or negative “monetary yield” for their on-demand deposits
 held with (lent to) their bank. Deposits typically yield a zero (or negligible) deposit interest
 rate and incur a service fee to maintain a bank account. Banks offer a “convenience yield”
 by providing a safe location to store cash, banking services and an eM.o.P.. Depositors
 will intentionally or subconsciously compare their deposit options based on an aggregate
 yield combining monetary yield and convenience yield.176 The design of the digital euro
 will determine whether its aggregate yield surpasses deposits and triggers migration from
 deposits to C.B.D.C.
           A possible solution is to offer a variable remuneration rate for digital euro that
 can be adjusted to avoid C.B.D.C. supplanting deposits.177 If deposits offer a negligible
 monetary yield, the digital euro could require a negative remuneration rate.178 Variable
 remuneration or a negative interest rate on holdings may be problematic to adopt in
 conformity with the Treaties.179 P.S.P.s could charge service fees instead,180 but this
 conflicts with the expectation that the digital euro would be free to access.181
           Another possible solution is the holding limit. Users would respond by continuing
 to hold most of their money as deposits. However, if a reduction in deposits is the problem,
 the holding limit is only a marginally effective solution.182




174
    Bindseil, supra note 10.
175
    Agur et al., supra note 8; Bank for International Settlements, supra note 16. For a survey of studies on the
    potential impact, see Bank for International Settlements, supra note 10.
176
    Kumhof & Noone, supra note 8.
177
    Barrdear & Kumhof, supra note 9; Keister &Sanches, supra note 9; Kumhof & Noone, supra note 8.
178
    Agur et al., supra note 8. Alternatively, a “refresh fee” could be charged intermittently on holdings; see
    Chaum et al., supra note 158.
179
    See Section 3.1.
180
    Bordo & Levin, supra note 8.
181
    European Central Bank, supra note 2, at 19; see Requirement 2. However, cash machine withdrawal fees are
    charged and so it is conceivable that P.S.P.s charge fees to access digital euro.
182
    The Sound of Economics,                Money, Money, Money!,            Bruegel,  (Apr.         29,    2021)
    https://www.bruegel.org/2021/04/money-money-money/.

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      LET THE DIGITAL EURO CIRCULATE: INTRODUCING A RETAIL C.B.D.C. IN THE EUROZONE WITH
                                UNLIMITED HOLDINGS BY USERS


 A e3,000 holding limit would still tolerate the Eurozone banking system losing around
 one trillion euros in funding.183 Furthermore, the impact of the holding limit on user
 behaviour will significantly differ depending on income, deposits and spending habits.
 This includes divergence in median income between Eurozone Member States.184 The
 holding limit would not impede those whose deposits are typically around or below the
 threshold. High-earning depositors that spend large sums each month may find digital
 euro to be an inconvenient M.o.P.185 The holding limit would, therefore, be a blunt
 instrument to achieve the objective of deterring substitution from deposits to digital
 euro.186
            However, it both ignores the realities of human behaviour and the dynamism of
 the capitalist market system to assume that the digital euro will simply lead to a mass
 migration from deposits. The price mechanism is a dynamic process that is not captured
 by examining a static equilibrium measured on ceteris paribus principles.187 Banks can
 adjust to the introduction of C.B.D.C. It is necessary to consider the likely responses and
 counter-responses by relevant stakeholders.



        5.3. ADJUSTMENTS BY BANKS

 Banks can improve the aggregate yield that they offer to depositors compared to digital
 euro: (i) by increasing monetary yield of deposits; (ii) by increasing convenience yield of
 deposits; and/or (iii) by reducing aggregate yield of digital euro.188
            Banks can incentivise deposits by increasing their deposit interest rate.189
 Reducing the service fee charged to depositors is an alternative, though perhaps a less
 salient, means to increase the monetary yield. The immediate consequence is to increase
 funding costs and reduce profit margins for that bank.190 In any oligopolistic banking

183
    Adrian Croft, A digital euro would be “crypto kryptonite” for fintechs and a threat to banks, a critical new report warns,
    Fortune, (Mar. 13, 2021), https://fortune.com/2021/03/13/digital-euro-fintech-banking-cryptourrency-
    european-central-bank/ (last visited Dec. 8, 2021).
184
    See Eurostat, Mean and Median Income by Household Type - EU-SILC and ECHP surveys, Eurostat - Data Explorer
    (2022), https://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=ilc_di04.
185
    See Deutsche Bundesbank, supra note 147.
186
    Unless the holding limit would be personalised for each user based on their personal circumstances, which
    is not being proposed.
187
    F. A. von Hayek, Economics and Knowledge, 4 Economica 33 (1937).
188
    Although this Section focuses on retail on-demand deposits, the same principles apply to all depositors.
189
    Chiu et al., supra note 9. This is anticipated by Sveriges Riksbank; see Sveriges Riksbank, supra note 29. U.S.
    postal banks saw their inflows and outflows shift substantially as their deposit interest rate exceeded (1930s
    and 1940s) then underperformed (late 1940s and 1950s) market rates; see Schuster, Jaremski, and Perlman,
    supra note 12.
190
    First-movers will likely prompt competitors to match their deposit interest rate to deter depositors
    switching bank; see Ching-Wai (Jeremy) Chiu & John Hill, The Rate Elasticity of Retail Deposits in the
    United Kingdom: A Macroeconomic Investigation (Bank of England, Staff Working Paper No. 540, 2015),
    http://www.ssrn.com/abstract=2641028.
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 2023]                            UNIVERSITY OF BOLOGNA LAW REVIEW                                      [Vol. 8:1


 markets, where banks may currently pay a deposit interest rate below what would have
 been required in a competitive market,191 such excess profits do not merit protection
 from the impact of C.B.D.C.
           A proportion of bank profits derive from the seigniorage that they generate
 when creating Co.B.M. by lending. Higher deposit interest rates due to C.B.D.C. would
 increase the cost of money creation and reduce seigniorage. If banks reduce their
 lending, this also reduces seigniorage.192                   However, seigniorage for banks is not a
 privilege that the Eurosystem should be interested in protecting.193 Central banks have
 historically curtailed seigniorage generated by banks issuing their own banknotes.194
 C.B.D.C. would simply erode bank seigniorage in digital money.195
           Banks and their bankers are profit-seeking and generally lend when they expect
 an investment to be profitable for themselves.196 In principle, lending is profitable for
 a bank when the interest charged to borrowers exceeds the interest paid on its funding
 (e.g., deposits) – positive net interest margin. Therefore, lending remains worthwhile for
 a bank provided the cost of deposits remains below the rate at which the bank can lend to
 borrowers.197 Regulatory capital and liquidity requirements complicate how a bank can
 expand its profitable lending. Shareholder expectations regarding the rate of return on
 equity may make less-profitable lending unattractive for a particular bank. Nonetheless,
 while bank lending is profitable and any bank can obtain profit by simply creating Co.B.M.,
 in a competitive market, a bank should emerge willing to lend. C.B.D.C. would merely
 reduce the net interest margin.
           Yet further adjustments could see banks maintain their profitability. A higher
 deposit interest rate that retains existing depositors and leads to inflows from other
 sources could increase deposits and reduce funding costs.198 Banks may reduce branch
 locations and cut operating costs.199 They may even hold the pricing power to increase
 their lending interest rate charged to borrowers.200


191
    Chiu et al., supra note 9; Robin Greenwood, Samuel G. Hanson & Jeremy C. Stein, The Federal Reserve’s
    Balance Sheet as a Financial-Stability Tool, Jackson Hole Economic Symposium Conference Proceedings (2016)
    https://www.hbs.edu/faculty/Pages/item.aspx?num=52330; Grunewald et al., supra note 6.
192
    On the impact of C.B.D.C. on seigniorage, see Bank for International Settlements, supra note 17.
193
    Brunnermeier & Niepelt, supra note 9; Nicholas Gruen, Central Banks Get Serious On Digital Currencies, Financial
    Times, (May 12, 2021) https://www.ft.com/content/faa29abd-aa2e-479b-9706-79ee16be9e35.
194
    E.g. Canada; see Grodecka-Messi, supra note 13.
195
    The Eurosystem would generate such seigniorage instead.
196
    Hyman P. Minsky, The Financial Instability Hypothesis (Levy Economics Institute, Working Paper No. 74, 1992),
    http://hdl.handle.net/10419/186760.
197
    Tobin, supra note 169.
198
    Andolfatto, supra note 9; Chiu et al., supra note 9.
199
    Grodecka-Messi, supra note 13.
200
    Mancini-Griffoli et al., supra note 8.


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      LET THE DIGITAL EURO CIRCULATE: INTRODUCING A RETAIL C.B.D.C. IN THE EUROZONE WITH
                                UNLIMITED HOLDINGS BY USERS


 It is often assumed that an increase in lending interest rates will reduce the quantum of
 bank lending.201 This simple assessment of supply and demand may underestimate a
 financial system containing competing financiers and flexible funding sources. Firstly, it
 neglects that a borrower will also be a depositor. If a borrower is receiving additional
 income due to the higher deposit rate,202 it has additional funds to finance higher
 borrowing costs – leaving that borrower in essentially the same net position. Secondly,
 borrowers can seek alternative sources of funding, which may discipline banks to resist
 increasing their lending interest rate.               Indeed, E.U. policy is currently seeking to
 encourage the use of the capital markets and reduce reliance on banks for credit
 intermediation by promoting the Capital Markets Union.203 Thirdly, new entrants may
 be willing to enter the banking market if there is an opportunity to undercut the
 incumbents profitably.204 The banking sector may maintain its credit intermediation
 even as incumbent banks reduce their lending.
            Furthermore, not all bank disintermediation has the same economic impact.
 Easy credit conditions encourage the financing of speculative projects and asset price
 bubbles.205 If an increase in borrowing costs dissuades speculative investments and
 unproductive projects, this would be beneficial to both the bank and the economy.206
 Moreover, the additional monetary yield received by depositors may stimulate the
 economy and offset the economic impact of any decline in bank lending.207
            Banks have continually increased the convenience yield offered on deposits to
 outcompete cash as a M.o.P. However, this may be a challenging strategy to adopt for
 C.B.D.C. Deposits cannot be safer than C.B.D.C. It is difficult to materially (and
 observably) reduce the risk of bank failure. Banks would have to be willing to segregate
 services between depositors and C.B.D.C. users to generate a convenience yield spread


201
    Keister & Sanches, supra note 9; Kim & Kwon, supra note 9.
202
    This may also be indirect if deposit interest rates impact money market rates.
203
    See Communication from the Commission to the European Parliament, the Council, the European
    Economic and Social Committee and the Committee of the Regions:                 A Capital Markets Union
    for people and businesses - new action plan,                EUROPEAN COMMISSION (2020) 590 final
    (Nov. 24, 2020). https://eur-lex.europa.eu/resource.html?uri=cellar:61042990-fe46-11ea-b44f-
    01aa75ed71a1.0001.02/DOC_1&format=PDF. Although capital markets may already offer lower lending
    interest rates, larger arrangement costs (and other non-monetary burdens) mean that smaller capital
    markets financings are typically not worthwhile for borrowers compared to obtaining bank financing. If
    bank financing incurs higher servicing costs, this reduces the disincentive to obtaining capital markets
    funding.
204
    Although there are high barriers to entry to becoming a licensed bank, investors may acquire a smaller
    bank then provide capital to expand its balance sheet and E.U. passporting rights allow an E.U. bank to open
    a branch in another Member State.
205
    Minsky, supra note 196.
206
    Keister & Sanches, supra note 9.
207
    Agur et al., supra note 8.


                                                       30
 2023]                             UNIVERSITY OF BOLOGNA LAW REVIEW                                      [Vol. 8:1


 between deposits and C.B.D.C.208 But the banks would also have to consider the trade-off
 of losing potential customers for the on-selling of financial products.
            If banks are offering their own Co.B.M. payment systems alongside the digital
 euro, they are able to both improve the appeal of deposits and undermine the appeal of
 the digital euro. The latter approach would avoid incurring the additional expense to
 increase the aggregate yield of deposits. Banks can tailor the fees charged for certain
 services to incentivise depositors to adopt certain behaviour.209 Banks may cross the line
 into abusing such measures as a defensive and anti-competitive tactic.                               Legislators
 combated banks potentially abusing their dominant position as gatekeepers to the
 existing payment system. In response, P.S.P.s have been guaranteed fair access to the
 payment system.210 Regulation is likely to be necessary to delineate the conflict of
 interest between banks as P.S.P.s of and competitors to the digital euro.
            The E.U., however, faces the practical difficulty that it must conciliate the banks
 or construct a digital euro system that can function without their participation. Banks
 hold significant power over the transition process to the digital euro due to reliance on
 banks in both the existing payment system and the two-tier digital euro system. Their
 resistance could be terminal for digital euro ever reaching mass adoption.211
            The impact of the digital euro on bank intermediation and the Eurozone
 economy should, therefore, be viewed as an aggregation of heterogeneous micro-level
 adjustments by banks, depositors and borrowers. These differences will be shaped by the
 differences between local banking markets and the ease of access to capital markets and
 foreign banking markets. There will not necessarily be a uniform Eurozone outcome
 triggered by the digital euro.212




208
    Bindseil, Tiered C.B.D.C., supra note 10; Bindseil, Central Bank Digital Currency, supra note 10.
209
    E.g.         In Finland;          see Hanna Jyrkönen & Heli Paunonen,                        Card, Internet and
    Mobile Payments in Finland,                (Bank of Finland,             Discussion Papers,        2003) (Fin.).,
    https://helda.helsinki.fi/bof/bitstream/handle/123456789/7955/107277.pdf.
210
    European Union, supra note 80, at 35–36.
211
    E.g., In Ecuador, banks were hostile to the Dinero Electrónico; see Arauz, Garratt, and Ramos F., supra note
    15. In Finland, banks developed their own financial technology (i.e., debit cards) that made Avant Cards
    redundant; see Jyrkönen & Paunonen, supra note 209.
212
    Agent-based modelling exists on the impact of introducing a C.B.D.C. system; see Digital Euro Association,
    Agent-Based Simulation of CBDC, https://home.digital-euro-association.de/podcast.


                                                         31
      LET THE DIGITAL EURO CIRCULATE: INTRODUCING A RETAIL C.B.D.C. IN THE EUROZONE WITH
                                UNLIMITED HOLDINGS BY USERS


        5.4. ADOPTION BY RETAIL DEPOSITORS

 The decline of Ce.B.M. in the Eurozone is a consequence of a concerted public policy that
 has driven Co.B.M. to being considered as practically equivalent to Ce.B.M.213
 Governments increasingly require payment to be made in Co.B.M. despite cash being
 legal tender.214 Yet the digital euro is desired to maintain the anchoring role of Ce.B.M. in
 the financial system, which may be lost if cash ceases to be available to redeem Co.B.M.215
 The digital euro only serves this purpose if it is adopted by potential users, but it is being
 designed to be less attractive than deposits and to avoid disruption of the banking sector.
 The holding limit represents a symptom of this incoherence in the digital euro project.
            Concern for the banking sector underestimates that the greater difficulty may be
 convincing depositors to become C.B.D.C. users.216 As an e.M.o.P., C.B.D.C. constitutes a
 substitute for Co.B.M.217 Better understanding of consumer payment preferences is
 required to anticipate their response to C.B.D.C.218 But there is no apparent reason for a
 Eurozone retail depositor to adopt the digital euro as their M.o.P. in place of Co.B.M.219
 The layperson depositor perceives no financial risk due to deposit insurance220 and no
 difference between Co.B.M. and Ce.B.M.221 The Eurozone already offers advanced
 payment infrastructure.


213
    This was intensified by the COVID-19 pandemic.                        P.S.P.s were encouraged to increase
    contactless card payment limits to the legal maximum of fifty euros; see European
    Banking Authority, Statement on Consumer and Payment Issues in Light of COVID19, (2020),
    https://www.eba.europa.eu/sites/default/documents/files/document_library/News%20and%20Press
    /Press%20Room/Press%20Releases/2020/EBA%20provides%20clarity%20to%20banks%20and%20consumers
    %20on%20the%20application%20of%20the%20prudential%20framework%20in%20light%20of%20COVID19
    %20measures/Statement%20on%20consumer%20protection%20and%20payments%20in%20the%20COVID19
    %20crisis.pdf (last visited Mar 15, 2022). See also European Union, Commission Delegated Regulation (EU) 2018/389
    of 27 November 2017 supplementing Directive (EU) 2015/2366 of the European Parliament and of the Council with
    regard to regulatory technical standards for strong customer authentication and common and secure open standards
    of communication, OJ L 69 23 11 (2018), http://data.europa.eu/eli/reg_del/2018/389/oj/eng.
214
    Robert Freitag, Euro As Legal Tender (and Banknotes), in The EU Law of Economic and Monetary Union (Fabian
    Amtenbrink, Christoph Hermann & René Repasi eds., 2020).
215
    Wierts & Boven,            supra note 7.                See also Fabio Panetta,         Central Bank Digital
    Currencies:      a Monetary Anchor for Digital Innovation,                 European Central Bank (2021),
    https://www.ecb.europa.eu//press/key/date/2021/html/ecb.sp211105 08781cb638.en.html (last visited
    Dec 8, 2021); Panetta, supra note 140; Panetta, supra note 5.
216
    The E.C.B. has acknowledged this possibility; see Panetta, supra note 140; Panetta, supra note 215.
217
    Kumhof & Noone, supra note 8.
218
    Francesca Carapella & Jean Flemming, Central Bank Digital Currency: A Literature Review, Feds Note (Nov. 2020).
219
    Digital Euro Association, Should the ECB Issue a Digital Euro?, https://home.digital-euro-
    association.de/podcast/en (last visited Feb 14, 2022); Mancini-Griffoli et al., supra note 8.
220
    E.g., Deposit insurance for U.S. postal banks predated commercial banks and postal banks became obsolete
    once all banks benefitted from deposit insurance; see Schuster et al., supra note 12.
221
    See Bank of England, Responses to the Bank of England’s March 2020 Discussion Paper on CBDC, (Bank of
    England, Discussion Paper, 2021), https://www.bankofengland.co.uk/paper/2021/responses-to-the-bank-
    of-englands-march-2020-discussion-paper-on-cbdc (last visited Dec 27, 2021); Deutsche Bundesbank, supra
    note 147.


                                                         32
 2023]                           UNIVERSITY OF BOLOGNA LAW REVIEW                                    [Vol. 8:1


 Although users can be expected to use the M.o.P. that offers the best net benefit to
 them,222 the reality is that people are unlikely to adopt a new M.o.P. simply because it is
 marginally better than their existing M.o.P.223 It would pose an inconvenience to
 undertake the transition. There is a network effect that requires a critical mass of users
 for a M.o.P. to take hold.224 First-mover advantage takes precedence.225 But Co.B.M. is
 the first-mover, and bifurcating money between deposits and digital euro produces
 inconvenience for a retail user without any apparent benefit.
           Any change in user behaviour is likely to be gradual as many alternative M.o.P.s
 already exist.226 The digital euro may only ever reach a circulation similar to that of the
 cash currently in circulation.227 That may suffice to maintain a Ce.B.M. anchor, but the
 digital euro would remain vulnerable to being swept aside upon further advances in
 Co.B.M. payment technology. Such an outcome is already foreshadowed by the failure of
 the Dinero Electrónico in Ecuador228 and the Avant Card in Finland,229 where both failed
 to gain a critical mass of users and were eventually discontinued.




222
    Mancini-Griffoli et al., supra note 8.
223
    E.g. Avant Card in Finland offered more advanced payment technology, microchips rather than magnetic
    stripes, but this was not salient with consumers; see Grym et al., supra note 16.
224
    Mikael Stenkula, Carl Menger and the Network Theory of Money, 10 European Journal of the History of Economic
    Thought 587 (2003). E.g. Avant Card in Finland suffered from expensive transition costs for merchants and
    a lack of merchant take-up; see Grym et al., supra note 16; Jyrkönen & Paunonen, supra note 209.
225
    Agur et al., supra note 8; Khiaonarong & Humphrey, supra note 19.
226
    Grodecka-Messi, supra note 13.
227
    Agur et al., supra note 8.
228
    Arauz et al., supra note 15.
229
    Gerard, supra note 164; Grym et al., supra note 16.




                                                       33
      LET THE DIGITAL EURO CIRCULATE: INTRODUCING A RETAIL C.B.D.C. IN THE EUROZONE WITH
                                UNLIMITED HOLDINGS BY USERS


        5.5. BANK RUNS

 A bank run arises when depositors fear that their bank will be unable to satisfy
 withdrawals – whether because it is failing or suffering from a self-fulfilling panic. There
 is concern that depositors will be more likely to run and will run at an exceptionally
 faster rate once C.B.D.C. is available instead of cash.230 The digital euro may then create
 instability in the Eurozone banking system through this run dynamic.231
            The presence of the digital euro does not materially alter the run dynamic. Bank
 failure would likely be an insufficient catalyst to run from retail deposits to digital euro due
 to deposit insurance232 and bank resolution tools. Depositors holding uninsured deposits
 have every reason to run.233 Uninsured creditors are always subject to the risk of bank
 failure and would anticipate where they could run, whether investment assets or money
 market instruments.
            If a depositor fears financial loss, a depositor will run.234                         The physical
 inconvenience of cash has traditionally functioned as a barrier to a run. Such barriers
 are merely a palliative, not a cure. If depositors wish to run, the question is “how” and
 not “if ”. A depositor run to cash is now an antiquated image that does not portray bank
 runs in the 21st century. Depositors already have the means to run from their bank
 swiftly using technology and without queuing outside of their bank.235 Internet banking
 and mobile banking facilitate money transfers remotely. The digital euro is merely
 another potential substitute rather than opening the floodgates. Its status as risk-free
 Ce.B.M. may attract depositors as the path of least resistance.236 But it is possible to open
 an account with a bank, an e-money institution or an investment broker within minutes

230
    Bank for International Settlements, supra note 17.
231
    Kim & Kwon, supra note 9; Nabilou, supra note 7.
232
    Douglas W. Diamond & Philip H. Dybvig, Bank Runs, Deposit Insurance, and Liquidity, 91 J. POL. ECON.
    401 (1983). See European Union, Directive 2014/49/EU of the European Parliament and of the Council of
    16 April 2014 on deposit guarantee schemes (recast), OJ L 173 149 (2014), https://eur-lex.europa.eu/legal-
    content/EN/TXT/PDF/?uri=CELEX:02014L0049-20140702&from=EN. Deposit insurance protects deposits
    up to e100,000 per bank and payment is (currently) assured within ten working days. Runs may
    arise if the Member State is unable to cover any shortfall in the scheme’s funds. This concern
    would be reduced if the European Deposit Insurance Scheme (E.D.I.S.) is implemented; see European
    Union, Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU)
    806/2014 in order to establish a European Deposit Insurance Scheme, (2015), https://eur-lex.europa.eu/legal-
    content/EN/TXT/PDF/?uri=CELEX:52015PC0586&from=EN.
233
    E.g., U.K. deposit insurance only protected ninety percent of deposits up to £35,000 at the time of the run on
    Northern Rock; all depositors feared financial loss and had reason to run; see Shin, supra note 14.
234
    Douglas W. Diamond & Raghuram G. Rajan, Liquidity Risk, Liquidity Creation, and Financial Fragility: A Theory of
    Banking, 109 J. POL. ECON. 287 (2001). Williamson, supra note 9.
235
    Kumhof & Noone, supra note 8; Mancini-Griffoli et al., supra note 8. E.g., Retail depositor withdrawals in the
    run on Northern Rock were more substantial from non-branch retail deposits than branch retail deposits;
    see Shin, supra note 14.
236
    Kumhof & Noone, supra note 8.


                                                         34
 2023]                             UNIVERSITY OF BOLOGNA LAW REVIEW                                       [Vol. 8:1


 online.237 Meanwhile, a real-time gross settlement [R.T.G.S.] system for the digital euro
 may face settlement delays comparable to those of traditional designated-time net
 settlement [D.T.N.S.] systems during a bank panic.238 This is especially a concern if the
 failing bank lacks sufficient digital euro to satisfy withdrawal requests instantly.
            Even upon a systemic banking crisis involving mass withdrawals to the digital
 euro, the holding limit would be problematic. Necessity is likely to inspire creativity.
 Secondary markets develop to allow liquidity to those seeking to dispose of assets. When
 deposits are worth less than their nominal value, cash is unavailable and the digital euro
 is restricted by the holding limit, it is foreseeable that depositors will sell their deposits
 below par and the digital euro will obtain a market value above its nominal value.239
 Someone who has headroom in their C.B.D.C. wallet may be willing to hold digital euro
 for someone else in return for a fee.240 The digital euro losing its par value with physical
 euro would certainly not constitute stability in the money markets.



      5.6. CENTRAL BANK REFINANCING OPERATIONS

 If a bank is solvent with a quality loan portfolio but requires liquidity, the bank remains
 creditworthy to raise funding from wholesale markets. Securitisation and covered bonds
 allow banks to release liquidity from illiquid loans. Despite its hostility to securitisation
 in the aftermath of the financial crisis,241 the E.U. increasingly recognises the usefulness
 of securitisation.242 Information asymmetry is a challenge in accurately valuing a bank’s
 loan portfolio. There are frictions when relying upon the capital markets for funding
 that deposit funding does not typically encounter.243 It should also be acknowledged

237
    Eurozone deposits that left weaker banks during the financial crisis and the sovereign debt crisis were most
    commonly transferred to stronger banks, not non-banks or cash; see Bindseil, Tiered C.B.D.C., supra note 10;
    Bindseil, Central Bank Digital Currency, supra note 10.
238
    On payment settlement, see Athanassiou, supra note 57; Andrew Dent & Will Dison, The Bank of England’s
    Real-Time Gross Settlement Infrastructure, (2012); Kahn & Roberds, supra note 99.
239
    Pål Krogdahl & Ville Sointu, LIVE Episode!              To CBDC or not to CBDC, What Was the Question?,
    https://anchor.fm/fintech-daydreaming/episodes/LIVE-episode–To-CBDC-or-not-to-CBDC–what-was-
    the-question-em2j8q. Sveriges Riksbank raises this concern; see Sveriges Riksbank, supra note 29, at
    2.
240
    E.g., In the United States, deposit brokers facilitate deposit insurance protection for depositors
    holding more than the $250,000 limit; see IntraFi Network Deposits, How IntraFi Network Deposits Works,
    https://www.intrafinetworkdeposits.com/how-it-works/ (last visited Jun 21, 2022).
241
    See Gerard Kastelein, Securitization in the Capital Markets Union: One Step Forward, Two Steps Back, in CAPITAL
    MARKETS UNION IN EUROPE 464 (Danny Bush et al. eds., 2018).
242
    Synthetic (“on-balance-sheet”) securitisations have become eligible for “S.T.S.” securitisations; see European
    Union, Regulation (EU) 2021/557 of the European Parliament and of the Council of 31 March 2021 amending Regulation
    (EU) 2017/2402 Laying down a General Framework for Securitisation and Creating a Specific Framework for Simple,
    Transparent and Standardised Securitisation to Help the Recovery from the COVID-19 crisis, OJ L 116 1 (2021).
    https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32021R0557&from=EN.
243
    Michael Woodford, Financial Intermediation and Macroeconomic Analysis, 24 J. ECON. PERSPS.,2010, at 21, 44.


                                                          35
      LET THE DIGITAL EURO CIRCULATE: INTRODUCING A RETAIL C.B.D.C. IN THE EUROZONE WITH
                                UNLIMITED HOLDINGS BY USERS


 that liquidity in the financial markets is procyclical and may be unavailable when banks
 are most under stress from depositor withdrawals.244 Nonetheless, if market liquidity
 reaches a stage where market counterparties are unwilling to lend on realistic terms, the
 central bank will be the next avenue for liquidity.
            Migration by depositors from deposits to C.B.D.C. results in a bank’s funding
 moving to the central bank. Both require corresponding changes to their assets or
 liabilities (or equity) in order to balance their balance sheet. This is particularly pressing
 if there are sudden withdrawals where obtaining funding from the private sector is
 impractical.245 Deposit interest rates suffer a lag before stimulating deposits.246 An
 equilibrium can be maintained if new C.B.D.C. inflows to the central bank are recycled to
 fund the deposit outflows from the bank.247 The bank would not have to liquidate its
 loan assets to fund withdrawals. The central bank would not need to redeploy its surplus
 funding towards buying large quantities of certain bonds, which could distort the market
 for those securities,248 given that market participants do not necessarily substitute
 between all classes of securities.249
            The Eurosystem operates refinancing operations that provide short-term
 funding to banks secured against securities or loans as collateral.250 These operations
 have expanded since the financial crisis to targeted longer-term refinancing operations
 [hereinafter T.L.T.R.O.s] that provide multi-year funding to banks to incentivise lending
 to the real economy.251 The fundamental objective remains constant providing funding
 to banks to maintain liquidity flowing from banks into the Eurozone economy.
            Expanding the use of refinancing operations to balance out movements from
 deposits to digital euro would, therefore, be both ground-breaking and unexceptional.

244
    Edoardo D. Martino, Regulating Stablecoins as Private Money between Liquidity and Safety. The Case
    of the EU “Market in Crypto Asset” (MiCA) Regulation, (Amsterdam Law School, Research Paper No.
    2022-2027, 2022; Amsterdam Center for Law and Economics, Working Paper No. 22-07, 2022),
    https://ssrn.com/abstract=4203885 (last visited Jan 4, 2023).
245
    Sveriges Riksbank anticipates providing stopgap funding upon sudden withdrawals to C.B.D.C.; see Sveriges
    Riksbank, supra note 29, at 2.
246
    Chiu & Hill, supra note 190.
247
    Barrdear and Kumhof, supra note 9; Brunnermeier & Niepelt, supra note 9; Kim & Kwon, supra note 9; White,
    supra note 71. E.g., U.S. postal banks lent their deposits to local banks prepared to pay their lending interest
    rate before applying any surplus towards buying government bonds; see Schuster et al., supra note 12.
248
    Williamson, supra note 9.
249
    Vasco Cúrdia & Michael Woodford, The Central-bank Balance Sheet as an Instrument of Monetary Policy, 58 J.
    MONETARY ECON. 54 (2011).
250
    These offer overnight, one-week and three-month funding; see European Central Bank, Open Market
    Operations, https://www.ecb.europa.eu/mopo/implement/omo/html/index.en.html (last visited Jun 21,
    2022).
251
    European Central Bank, ECB Extends Pandemic Emergency Longer-Term Refinancing Operations, (2020),
    https://www.ecb.europa.eu/press/pr/date/2020/html/ecb.pr201210 8acfa5026f.en.html (last visited May
    11, 2022). This was supplemented during the COVID-19 pandemic with pandemic emergency longer-term
    refinancing operations [P.E.L.T.R.O.s].


                                                         36
 2023]                            UNIVERSITY OF BOLOGNA LAW REVIEW                                    [Vol. 8:1


 The Eurosystem is already empowered under the Treaties to conduct refinancing
 operations.252 Although T.L.T.R.O.s were purported to be temporary and exceptional,
 T.L.T.R.O.s remain a source of bank funding. This policy would grasp the nettle and
 acknowledge the permanence of the Eurosystem’s role in maintaining liquidity in the
 Eurozone banking system.253 Given its role as supervisory authority for Eurozone banks
 within the Single Supervisory Mechanism,254 the E.C.B. has a further interest beyond its
 “price stability” mandate in stabilising Eurozone banks.255 The Eurosystem would then
 need to remain willing to expand its balance sheet when liquidity is required by banks in
 response to demand for digital euro.
           Central banks function as lenders of last resort [hereinafter L.O.L.R.] to provide
 emergency liquidity to solvent banks. This avoids a “fire sale” by the bank to raise cash
 that turns illiquidity into balance sheet insolvency. This principle dates back to Walter
 Bagehot’s Lombard Street (1873). Providing liquidity in such circumstances is what central
 banks are supposed to do.256 The central bank is the only potential counterparty able to
 lever up its balance sheet and outlast a panic,257 and is not incentivised to run.258
 Therefore, if a bank’s depositors run to digital euro, the E.C.B. and the relevant N.C.B.
 would function as L.O.L.R.
           The digital euro may serve to make L.O.L.R. funding more efficient. Whereas cash
 withdrawals suffer from a delay in observing outflows,259 the central bank can provide
 C.B.D.C. instantly to the bank to meet withdrawals.260 Indeed the central bank’s ability
 to respond rapidly could conceivably provide reassurance that deters bank runs.261 Yet
 if a bank run materialised, C.B.D.C. minimises disruption to economic activity by offering
 an e.M.o.P. to replace deposits, whereas cash may interfere with consumer transaction


252
    European Union, supra note 35, at 18.
253
    The E.C.B. wants to avoid such a role but has not ruled it out; see European Central Bank, supra note 2, at
    18–19. Cf. Central banks should accept an evolution in their monetary policy tools rather than reverting
    back to their pre-crisis framework; see Cristiano Boaventura Duarte, Alternative Monetary Targets, Instruments
    and Future Monetary Policy Frameworks, 31 REV. POL. ECON. 582 (2019). Central bank funding can counter
    overreliance on short-term wholesale funding; see Greenwood et al., supra note 191.
254
    See Ohler Christoph, Banking Supervision, in The EU Law of Economic and Monetary Union (2020).
255
    Nabilou & Prüm, supra note 20.            This would be under separate decision-making between its
    monetary policy and supervision functions; see European Central Bank, Decision of the European
    Central Bank of 17 September 2014 on the Implementation of Separation Between the Monetary Policy and
    Supervision Functions of the European Central Bank (ECB/2014/39), 57 (2014), https://eur-lex.europa.eu/legal-
    content/EN/TXT/PDF/?uri=CELEX:32014D0039(01)&from=EN.
256
    Williamson, supra note 9.
257
    Frost et al., supra note 11.
258
    Brunnermeier & Niepelt, supra note 9.
259
    Id.
260
    Mancini-Griffoli et al., supra note 8.
261
    Brunnermeier & Niepelt, supra note 9; Kumhof and Noone, supra note 8. See also Diamond & Dybvig, supra
    note 232.


                                                        37
      LET THE DIGITAL EURO CIRCULATE: INTRODUCING A RETAIL C.B.D.C. IN THE EUROZONE WITH
                                UNLIMITED HOLDINGS BY USERS


 patterns.262 The L.O.L.R.’s willingness to lend could also signal to the market that a bank’s
 loan portfolio remains valuable.263
            There will, however, be various aspects to the design of the digital euro
 refinancing operations to be carefully considered. The Eurosystem must avoid becoming
 so central to credit intermediation that it determines the cost of credit rather than the
 private markets.264 T.L.T.R.O.s entail banks making lending decisions and then sourcing
 funding from the Eurosystem.265                   The quantum of central bank funding does not
 necessarily alter that outcome. Mechanisms, such as auctions, can determine the supply
 and cost of credit in line with market and specific-party demand.266 Securities, such as
 securitisation and covered bonds, allow the capital markets to remain responsible for
 price discovery,267 before the central bank provides its liquidity via secondary market
 purchases268 or repo financing collateralised by such securities.269
            The E.C.B. will have to determine collateral criteria that protect the relevant N.C.B.
 against the risk of financial loss from the funding that it provides.270 This includes the
 type and quality of eligible assets, the overcollateralisation required and the quantum it is
 willing to lend.271 The E.C.B. and the C.J.E.U. have recognised it is inherent to the central
 bank’s operations to face potential losses from such activities.272 The banking sector can
 share that financial burden if the Eurosystem could recover losses from deposit insurance
 schemes.273 But the Eurozone Member States will have to consider to what extent they
 will be prepared to recapitalise a N.C.B. that suffers losses.274




262
    Williamson, supra note 9.
263
    For example, public deposit banks in Europe promoted stability by vouching for the quality of deposited
    metal coins then issuing Co.B.M. that was trusted as a M.o.P.; see Schnabel & Shin, supra note 11.
264
    Bank for International Settlements, supra note 17; Bank of England, Central Bank Digital Currency: Opportunities,
    Challenges and Design, (2020), https://www.bankofengland.co.uk/-/media/boe/files/paper/2020/central-
    bank-digital-currency-opportunities-challenges-and-design.pdf; Bindseil, Tiered C.B.D.C., supra note 10;
    Bindseil, Central Bank Digital Currency, supra note 10.
265
    E.g., U.S. postal banks’ deposits were applied to fund commercial banks without determining their lending
    decisions; see Schuster et al., supra note 12.
266
    White, supra note 71.
267
    Central banks remain competent to price loan portfolios themselves during market stress.
268
    The E.C.B. has adopted this approach for its bond-buying programmes with C.J.E.U. approval; see C-493/17
    Proceedings brought by Heinrich Weiss and Others, ECLI:EU:C:2018:1000, 113-28 (2018).
269
    Grym et al., supra note 16; Woodford, supra note 243.
270
    The Eurosystem must lend against “adequate collateral” (see E.S.C.B. Statute Article 18.1).
271
    Bank of England, supra note 263; Bindseil, Tiered C.B.D.C., supra note 10; Bindseil, Central Bank Digital Currency,
    supra note 10.
272
    Gauweiler and Others v Deutscher Bundestag, ECLI:EU:C:2015:400, 125-27 (2015).
273
    Kim & Kwon, supra note 9.
274
    Brunnermeier & Niepelt, supra note 9. This could be mitigated by shorter-term maturity for central bank
    lending; see Greenwood et al., supra note 191.


                                                          38
 2023]                                UNIVERSITY OF BOLOGNA LAW REVIEW                                            [Vol. 8:1


        6. THE PURPOSE OF DIGITAL EURO

      6.1. PAYMENT SYSTEM AUTONOMY

 Payment system autonomy is increasingly recognised as a matter of national security. The
 U.S. dominates the international payment system. Visa and Mastercard dominate card
 payments. In response, China developed UnionPay as an international alternative and
 Russia developed its own national payment system.275 E.U. payment system autonomy is
 restrained by relying substantially on non-E.U. companies.276 There are national payment
 initiatives to process card and online payments via the banking system. The E.C.B. desires a
 European card or online payment system277 and has endorsed278 European banks forming
 the European Payments Initiative in pursuit of that goal.279
             The shift in U.S. policy on Iranian financial sanctions in 2018 and the difficulties
 that it created for E.U. financial institutions highlighted the precariousness of E.U.
 dependence on U.S. payment intermediation.280 There remains the tail risk that any
 future breakdown in U.S.-E.U. relations destabilises E.U. payment systems.281 It would be
 politically sensitive – and may trigger state aid disputes at the World Trade Organization
 – if the E.U. promoted a European champion to force U.S. companies out of the E.U.
 payments market. As a new payment system without incumbents, the digital euro
 system offers a trojan horse for this strategy. Its use of Ce.B.M. and integration with the


275
    Siddharth Venkataramakrishnan, Polina Ivanova & Imani Moise, Russia Reaps Reward of Domestic Payment
    System After Visa and Mastercard Withdraw, FIN. TIMES (Apr. 20, 2022), https://www.ft.com/content/0bdef21b-
    426e-4e98-9a25-998c9bad500c (last visited May 11, 2022). Bank of Russia, National Payment System, (Dec.
    2022), https://www.cbr.ru/eng/psystem/ (last visited Jun. 21, 2022).
276
    Panetta, supra note 140; Panetta, supra note 215. Dependence on Visa and Mastercard is a long-running
    concern for the E.U.; see Smits, supra note 57. There is also Google and Apple in mobile payments and PayPal
    in online payments.
277
    European Central Bank, Card Payments in Europe: Current Landscape and Future Prospects: a Eurosystem
    Perspective, (2019), https://data.europa.eu/doi/10.2866/75461 (last visited May 11, 2022); EUROPEAN
    CENTRAL BANK, INNOVATION AND ITS IMPACT ON THE EUROPEAN RETAIL PAYMENT LANDSCAPE (2019),
    https://www.ecb.europa.eu/pub/pdf/other/ecb.other191204 f6a84c14a7.en.pdf.
278
    European Central Bank, ECB welcomes initiative to launch new European payment solution, (2020),
    https://www.ecb.europa.eu/press/pr/date/2020/html/ecb.pr200702 214c52c76b.en.html (last visited
    May 11, 2022).
279
    See European Payments Initiative, Major Eurozone Banks Start the Implementation Phase of a New Unified Payment
    Scheme and Solution, the European Payment Initiative (EPI), (2020), https://www.epicompany.eu/major-
    eurozone-banks-start-implementation-phase-unified-payment-scheme-solution-european-payment-
    initiative-epi/ (last visited Jun 21, 2022). The European Payments Initiative would use the S.E.P.A. Instant
    Credit Transfer (S.C.T. Inst) system to execute payments.
280
    E.U. persons are subject to anti-boycotting legislation in relation to U.S. sanctions on Iran; see European
    Union, Council Regulation (EC) No 2271/96 of 22 November 1996 protecting against the effects of the extra-territorial
    application of legislation adopted by a third country, and actions based thereon or resulting therefrom, OJ L 309 1 (1996),
    https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:01996R2271-20180807&from=EN.
281
    However, most E.U. Member States are members of the North Atlantic Treaty Organisation [N.A.T.O.]
    alongside the United States, which includes their commitment to collective self-defence.


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      LET THE DIGITAL EURO CIRCULATE: INTRODUCING A RETAIL C.B.D.C. IN THE EUROZONE WITH
                                UNLIMITED HOLDINGS BY USERS


 Eurosystem could justify requiring P.S.P.s to be E.U.-person-controlled entities for
 national security reasons.282
            This may serve the long-term economic interests of the E.U., but political reasons
 prevent this argument from being emphasised by the E.U. The economic ramifications of
 payment system autonomy are worthy of further research that goes beyond the scope of
 this paper. Payment system autonomy could offer the most convincing rationale for the
 digital euro.



        6.2. THE FUTURE OF MONEY

 The digital euro offers numerous potential use cases,283 including as a monetary policy
 tool,284 although these may lie outside the competence of the Eurosystem under the
 Treaties.285      However, the digital euro could simply represent the next step in the
 evolution of Ce.B.M.: from metal to paper to digital. C.B.D.C. threatens to disrupt
 incumbents. But this is inherent in the economic change that sustains the capitalist
 system.286 The state has historically supplanted privately-issued money.287 The holding
 limit would artificially prevent the digital euro from fully utilising the benefits of
 digitalisation. There should be caution exercised against any Luddite attempt to restrain
 technological progress in Ce.B.M.
            If the eventual outcome of C.B.D.C. is a state monopoly on money, banks would
 compete using their acumen as credit intermediaries and P.S.P.s - not their ability to
 create Co.B.M. There is an inherent instability within banks that has not been solved.288

282
    Digital Euro Association, The Future of Payments in the Euro Area, https://home.digital-euro-
    association.de/podcast; Krogdahl & Sointu, supra note 239. E.g., An undertaking must be more than
    fifty percent owned and controlled by E.U. nationals or Member States to operate an airline in the
    E.U.; see European Union, Regulation (EC) No 1008/2008 of the European Parliament and of the Council of 24
    September 2008 on common rules for the operation of air services in the Community (Recast), OJ L 293 3 4(f) (2008),
    https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:02008R1008-20201218&from=EN.
283
    These include sourcing macroeconomic data; “smart contracts” and programmable money; and distributing
    “helicopter money” from government; see Allen et al., supra note 8. Some wish to limit digital euro to novel
    use cases that avoid competing with the existing payment system; see e.g. Digital Euro Association, supra
    note 158; Digital Euro Association, ABI’s Spunta Project, https://home.digital-euro-association.de/podcast
    (last visited Mar 1, 2022).
284
    A negative C.B.D.C. remuneration rate could be applied to stimulate economic activity; see Allen et al., supra
    note 8; Bindseil, Tiered C.B.D.C., supra note 10; Bindseil, Central Bank Digital Currency, supra note 10; Bordo
    &Levin, supra note 8. This would be subject to the political limitations of negative rates; see Kumhof &
    Noone, supra note 8.
285
    See Section 3.1.
286
    JOSEPH ALOIS SCHUMPETER, CAPITALISM, SOCIALISM & DEMOCRACY (George Allen & Unwin eds., 5th ed. 1976).
287
    E.g., The Bank of Amsterdam; see Frost et al., supra note 11. E.g., Banknotes in Canada; see Grodecka-Messi,
    supra note 13. See also Bindseil, supra note 11.
288
    See Mervyn King, Banking: From Bagehot to Basel, and Back Again (2010), https://www.bankofengland.co.uk/-
    /media/boe/files/speech/2010/banking-from-bagehot-to-basel-and-back-again-speech-by-mervyn-
    king.pdf?la=en. C.f. There are efficiency gains from maturity transformation and bonding mechanisms
    favouring depositors; see Diamond & Dybvig, supra note 232; Diamond & Rajan, supra note 234.
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 2023]                            UNIVERSITY OF BOLOGNA LAW REVIEW                                     [Vol. 8:1


 Removing money creation from the banks may offer a solution.289 If banks would no
 longer be essential to providing on-demand deposits, they would not require an implicit
 state guarantee.290 Banks could conceivably operate akin to investment funds.291 The
 digital euro could be the harbinger of the end of banking as we know it – if proponents
 are willing to fundamentally reconsider the role of banks and Co.B.M. in the economy.




       CONCLUSION

 The potential design of the digital euro is entangled in contradictions in E.U. and E.C.B.
 policy. Retail deposits are protected by deposit insurance and made indispensable to
 payment settlement, yet cash must be supplemented by C.B.D.C. The public should adopt
 the digital euro, yet banks must be protected through deterring users from holding
 digital euro. The Capital Markets Union should wean borrowers from reliance on banks
 for credit intermediation, but the digital euro should not undermine banks as credit
 intermediaries.        The holding limit is a symptom of these contradictions.                          Despite
 concerns that the digital euro will overwhelm Eurozone banks, there is a dearth of use
 cases to motivate potential users to bifurcate their money between their bank account
 and their C.B.D.C. wallet. The E.C.B. is at danger of the digital euro falling victim to the
 Avant-isation of its C.B.D.C.
           A design for the digital euro that restricts or deters users from holding
 substantial amounts of digital euro is at risk of being followed despite both overstated
 concerns and an ineffectual proposed solution. A user-identified or pseudonymous
 C.B.D.C. wallet would repel potential users who prioritise anonymity. Yet the concept of
 digital cash – an anonymous, electronic means of payment – could be designed in a
 manner compatible with A.M.L./C.F.T. regulations.                          The challenge may be the
 technological feasibility of anonymous payments. The holding limit would needlessly
 inhibit a C.B.D.C. wallet functioning anonymously.

289
    This is not to discount that “free banking” without a central bank may be a more stable
    model; see David Beckworth, George Selgin on the Future of CBDC, Fed Accounts, and Stablecoins,
    https://macromusings.libsyn.com/george-selgin-on-the-future-of-cbdc-fed-accounts-and-stablecoins
    (last visited Mar 1, 2022); Milton Friedman & Anna J. Schwartz, Has Government any Role in Money?, 17 Journal
    of Monetary Economics 37 (1986); Selgin, supra note 168. Milton Friedman’s “k-percent rule” proposal
    for regulating the money supply may also be implementable in a C.B.D.C.-only monetary system; see
    Brunnermeier & Niepelt, supra note 9.
290
    Digital Euro Association, CBDC, Synthetic CBDC and Stablecoins, https://home.digital-euro-
    association.de/podcast; Nabilou, supra note 7.
291
    Bruegel, supra note 182.Martin Wolf, Cryptocurrencies Are Not the New Monetary System We Need, FIN. TIMES (July
    5, 2022), https://www.ft.com/content/f2faeec9-6d42-4d78-9c68-1f59795789a7 (last visited July 6, 2022).


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LET THE DIGITAL EURO CIRCULATE: INTRODUCING A RETAIL C.B.D.C. IN THE EUROZONE WITH
                          UNLIMITED HOLDINGS BY USERS


Although banking may emerge as a less profitable enterprise in a digital euro
environment, this should not impede profitable lending to productive projects. The
holding limit only offers a cap on outflows from Eurozone banks - not a solution to
outflows from deposits to digital euro. Rather, the Eurozone banking system can adjust
to the presence of the digital euro. Banks can incentivise depositors to maintain their
deposits. Borrowers may absorb any increased cost of credit. Capital markets and
cross-border banking services offer alternative sources of credit. Securitisation and
covered bonds offer an alternative means for banks to unlock liquidity from their illiquid
loan portfolios. The Eurosystem would also have to be prepared to potentially maintain
their refinancing operations at a larger scale than what is currently being employed
under T.L.T.R.O.s - if banks require additional liquidity. The threat of the digital euro
bank run does not alter this conclusion. The Eurosystem will have to grapple with
electronic bank runs in the 21st century irrespective of the presence of C.B.D.C. These
adjustments, therefore, require preparation and contingency planning, but the digital
euro would undermine neither price stability nor financial stability.




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