Digital Euro Essential for Managing Crypto Risks, Says Bank of Italy Head
Fabio Panetta, Governor of the Bank of Italy and member of the European Central Bank’s (ECB) Governing Council, recently argued that the long-awaited digital euro is a more potent tool for addressing systemic crypto risks than the forthcoming Markets in Crypto-Assets (MiCA) regulation. In his remarks at a fintech conference in Rome, Panetta emphasized the need for a central bank digital currency (CBDC) to ensure robust payment infrastructure, compliance and financial stability.
MiCA and the Stablecoin Landscape
MiCA, set to take effect in 2024, aims to harmonize rules around crypto-asset issuers across the European Union, particularly stablecoins pegged to fiat currencies. However, Panetta noted that, to date, MiCA has delivered only a modest increase in the issuance of compliant stablecoins:
- Limited issuer registration: Fewer than a dozen major stablecoin projects have applied for EU authorization under MiCA’s guidelines.
- Fragmented liquidity pools: Lack of integration with TARGET2 and TIPS settlement systems has kept on-chain liquidity shallow.
- Compliance costs: High capital requirements and prudential safeguards under MiCA have deterred smaller firms.
“While MiCA establishes a vital regulatory baseline, it cannot replace the need for a sovereign digital currency backed by central bank balance sheets,” Panetta said.
Technical Architecture of the Digital Euro
Panetta outlined key technical specifications for the digital euro, currently in an experimental phase at the ECB:
- Two-tier distribution: Commercial banks and payment service providers will handle issuance and customer interfaces, while the ECB manages core ledger maintenance.
- Distributed Ledger Technology (DLT): Permissioned DLT will enable transaction finality in under 500 milliseconds, with cryptographic proofs ensuring immutability.
- Privacy and AML/CFT: Tiered privacy shields allow small-value retail transactions to remain pseudonymous, while higher-value transfers trigger real-time AML screening.
- Interoperability: The system is being tested for seamless API connectivity with TARGET Instant Payment Settlement (TIPS) and cross-border CBDC bridges.
Comparative Global CBDC Efforts
Italy’s approach mirrors developments in China and the Bahamas but diverges on governance and distribution:
- e-CNY (China): A centrally controlled DLT platform focused on retail distribution via major banks, with tightly managed offline capabilities.
- Sand Dollar (Bahamas): Low-value retail CBDC leveraging a unified ledger model, primarily aimed at financial inclusion.
- Digital Euro: Emphasizes two-tier governance, strong privacy safeguards, and integration with existing euro-area infrastructure.
Regulatory Oversight and Risk Management
Key risk-management frameworks under discussion include:
- Reserve backing: Full central bank collateral ensures 1:1 liability coverage.
- Smart-contract limits: Automated caps on daily holdings to prevent illicit layering.
- Operational resilience: Redundant data centers and cross-border node replication to guarantee 99.999% uptime.
Future Outlook and Implementation Roadmap
The ECB plans to launch a digital euro prototype by mid-2025, with pilot programs in several eurozone member states. Panetta highlighted the importance of multi-stakeholder involvement:
- Public consultations: A second consultation phase will solicit feedback from fintechs, consumer groups and payment incumbents.
- Integration tests: Live trials alongside TARGET2 for limited-value retail use cases, expanding to wholesale in 2026.
- Legal amendments: EU lawmakers are drafting updates to the 1998 ECB Statute to grant explicit digital euro issuance powers.
Expert Opinions and Industry Perspectives
Market analysts at the Bank for International Settlements (BIS) have praised the digital euro’s “balanced design,” while voices in the fintech community point to potential challenges in scaling KYC/CDD processes:
- BIS Research: “A well-engineered CBDC can coexist with private digital assets and enhance monetary sovereignty.”
- Fintech CTOs: Concerns center on latency thresholds and the complexity of integrating legacy banking systems.