• Digital Euro
• Key Findings

(KF3) Legal and financial: vague liability and unarticulated risks

The ECB has not clarified compensation mechanisms for fraud victims in offline scenarios. It barely states that “either the PSP, the merchant or, in some cases, the consumer would be liable”, never the ECB itself [1]. It also remains unclear how the ECB will react when the double-spending protection has been overcome, enabling unlimited digital euro creation for every owner of wallets relying on the affected hardware (KF2). It is worth highlighting that the existing threat of counterfeited cash is limited by physical challenges of production and distribution for the counterfeiter; in the digital world, though, limiting the ability to copy data, once it becomes accessible, is impossible. Furthermore, the size of potential financial damage when protections have been overcome, scales linearly with the amount of transactions within the system, not the (smaller) aggregate amount stored in it. As this eventually poses a financial threat to the (digital) euro (Q24), the offline functionality would need to be disabled for the given type of payer’s devices— which is only possible when all payee’s devices become connected— until the affected hardware is replaced. Apart from not mentioning the security and financial risks connected to the offline version, the ECB also keeps quiet about the additional costs and complex logistics incurred by such hardware breaches.

Framing the digital euro as “stable and reliable” (cf. Q26) is an oversimplification. Being legal tender and backed by a central bank may make it a counter-party risk-free store of value for citizens, but the underlying digital payment system is still exposed to a broad range of risks, as discussed in this article. The ECB, as the responsible public operator of the digital euro, and ultimately the general public, must take these risks into consideration.

1. European Central Bank, A stocktake on the digital euro - summary report on the investigation phase and outlook on the next phase. https://www.ecb.europa.eu/euro/digital_euro/timeline/profuse/shared/pdf//ecb.dedocs231018.en.pdf, 2023.