Digital euro clears key hurdle as EU seeks to break free from U.S. credit cards

FILE PHOTO: Illustration shows Euro banknotes, Visa and Mastercard cards · Reuters

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By Francesco Canepa and Valentina Za

FRANKFURT, June 23 (Reuters) - The European Central Bank secured key parliamentary backing on Tuesday for the launch of a digital euro, an electronic means of payments aimed at making the euro zone less reliant on U.S. credit cards at a ‌time of fraying transatlantic relationships.

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The digital euro, essentially an electronic wallet guaranteed by the central bank but marketed by banks or fintech companies, will allow all euro zone ‌residents to make payments online and in person.

Six years in the making, the ECB's digital cash has become a more pressing issue since Donald Trump returned to the White House, slapping tariffs on even established trade partners such as ​the European Union and raising fears that the U.S. could one day weaponize its dominance over payment networks like Visa and Mastercard.

The approval of draft rules by the economic committee of the European Parliament comes after three years of wrangling between the ECB and banks, which have been concerned about deposit outflows and lost revenues and sought to limit the scope of the project.

"The introduction of the digital euro would... reduce overreliance on non-European providers by becoming a pan-European means of payment and would bring the single currency into the digital era by giving Union citizens the freedom to opt to pay ‌with central bank money in their daily transactions," the draft regulation ⁠says.

FINAL APPROVAL BY YEAR-END?

Siegbert Frank Droese of the far-right Europe of Sovereign Nations, a political group in the European Parliament, said his group had voted against the proposal, raising the likelihood that a further vote would be needed at the Parliament's plenary.

Barring an objection at the plenary, lawmakers should start negotiating ⁠with the European Council of EU governments and the European Commission next month, aiming for final approval by the end of the year.

The ECB, which plans to run a 12-month pilot of the digital euro starting in the second half of next year before a full launch in 2029, said it looked forward to Parliament adopting its final position.

Outside the euro area, China has been piloting a digital yuan at scale, ​while ​countries like India and Brazil have conducted trials. Britain has focused on research, amid concerns over privacy, financial ​stability and banking-sector impact, while U.S. President Trump has forbidden the Federal ‌Reserve from issuing a digital currency.

HOLDING LIMITS, POLITICAL OVERSIGHT POINT TO COMPROMISE

Like the European Council before it, the EU's Parliament laid out key safeguards for banks fearing deposit flights.

Lawmakers proposed in the draft regulation that the European Commission decide how many digital euros every user could own, based on an ECB recommendation, and review that ceiling at least every two years.

Businesses would not be allowed to hold digital euros for longer than 24 hours. The digital euro would not earn any interest or cost anything to its users.

"The proposal reflects political compromises," Laura Casonato, head of policy at Positive Money Europe, an advocacy group for monetary reform, said. "It keeps commercial banks at the centre of distribution, with only a limited role for public channels and other providers, and does not ‌go as far as presenting the digital euro as a true alternative to bank deposits."

Such concessions were likely ​crucial to win over critics such as Fernando Navarrete Rojas, the parliament’s negotiator on this file, who only recently ​dropped his opposition to making the digital euro available online.

ECB simulations show depositors could ​withdraw up to 699 billion euros ($795.88 billion) from euro zone banks if a limit on digital euro holdings was set at 3,000 euros each. This ‌is equal to 8.2% of all retail sight deposits, although the impact ​would be greater for small market lenders and retail ​banks.

COSTS, COMPENSATION AND EXEMPTIONS ARE OPEN QUESTIONS

Auke Zijlstra of the far-right Patriots for Europe Group said the only main discussions with other European institutions would revolve around how participating companies should be compensated for the set-up costs, which the ECB put at between four billion euros and six billion euros spread over four years.

But he added the digital ​euro may prove "obsolete" by the time it launches given competing initiatives by ‌the private sector. These include instant payment service Wero, backed by a consortium of major European banks.

Damian Boeselager of the Greens said the digital euro should be ​cheap for merchants, many of whom will be forced to accept the new means of payments. The Parliament's proposal contains an exemption for small-business owners and the ​self-employed.

($1 = 0.8783 euros)

(Additional reporting by Jesus Aguado in Madrid; Editing by Andrew Heavens and Susan Fenton)

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