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EBAday 2021: How a digital ID may shape the future of European payments

EBAday 2021: How a digital ID may shape the future of European payments

During October 2020, the European Council called for the development of an EU-wide framework for secure public electronic identification (e-ID), including interoperable digital signatures, to provide people greater control over their online identity and data, and to access public, private and cross-border digital services.

In its March 2021 Digital Compass, the Commission set the target of ensuring that 80% of EU citizens will be using an e-ID solution by 2030. The Council invited the European Commission (EC) to come forward with a proposal for a European Digital Identification initiative by mid-2021. While the EC had originally pencilled in an April announcement on a European digital ID, the date appears to have shifted, with the date now scheduled for 26 May.

Will the EC’s plans for an e-ID be delayed once more or be announced by end-of-month? More interestingly, could they be tied to an anticipated announcement on a digital euro?

A reason for optimism on this front lies in the developments being seen across the CBDC space. Last month the Bank of England announced work being made into a digital currency following ECB President Christine Lagarde’s statement in March that a decision on the delivery of a digital euro would be made within months.

Quoting a Goldman Sachs status report by Jan Hatzius, the FT reports that CBDC research and experimentation appears to show that issuing a CBDC outside of a “comprehensive national digital ID management system” will be all but impossible.

The report states: “Central banks have been cautious to avoid two key risks that CBDCs could pose. To avoid disintermediating banks by depriving them of their deposit base, central banks have imposed caps on balances, paid no interest on CBDC, or considered imposing a penalty interest rate on holdings above some threshold. To avoid facilitating illicit activity, central banks have mostly decided against fully anonymous accounts or capped anonymous transactions, and have tasked commercial bank intermediaries with monitoring customers and transactions.”

This means CBDCs would be linked to the personal accounts of individuals, including their personal data and credit history. The FT piece furthers that without CBDC cash would cease to function in the digital era, additionally, if western central banks don’t design and deliver cost-effective digital cash substitutes then naturally private sector competitors will issue them within “walled garden structures” instead. This would have a negative impact on vulnerable segments of society and afford them too much control over the system - “the ability to extract oversized rents.”

If one single private-sector provider were to dominate in this arena this would arguably exacerbate the current status of financial dis-inclusion. This problem would theoretically be solved by ensuring the CBDC is structurally universal and accessible.

“If the system is universal and cannot discriminate, it cannot also prevent the facilitation of illicit activity,” writes the FT.

“Exclusion or blacklisting in such a system is simply not an option. And that means other mechanic would have to come into play to solve the moral hazard inherent in such a set-up.”

If the delivery of a digital euro cannot be solved without first (or in parallel) addressing the function of a digital ID, perhaps widespread retail pressure for CBDC will drive a timely announcement on e-ID by the end of May as currently scheduled.

Digital identity and CBDC will be a core topic discussed at the Euro Banking Association and Finextra’s EBAday 2021. Running in digital format on 28-30 June for its sixteenth year, the event will welcome a host of board directors, chief executive officers and payments and technology heads from Europe’s leading banks, as well as selected fintechs and registration is now open.

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