Digital Euro, Monetary Objects, and Price Stability: A Legal Analysis

The Eurosystem is mandated to safeguard price stability according to article 127 of the Treaty on the Functioning of the European Union (TFEU). Based on a theoretical and policy-oriented approach, this article sheds light on a second public good with enormous practical relevance both for financial markets and institutions as well as for the general public that the Eurosystem, and ultimately the European Central Bank (ECB), must safeguardaccordingtoarticle128TFEU:theavailabilityofidealmonetaryobjectsforthe public.Whilemonetarypolicyconstitutestheinstrumentusedtokeeppricesstable,the availabilityofidealmonetaryobjectsisensuredthroughtheissuanceof‘cash’thatservesasbothmoneywithselectedpropertiesandananchorforothermoniesofthesamecurrency, includingsightdepositsatcommercialbanks.Today,theroleofidealmonetaryobjectsis (still)primarilyfulfilledbytangiblebanknotes.Astheuseoftangiblebanknotesdeclines, however,adigitalequivalentandcomplement—adigitaleuro—becomesincreasingly necessary.Accordingly,thearticleconcludesthattheECBisbothentitledandobliged de lege lata to issue a digital euro on the basis of article 128 TFEU. It further explains that neither tangible cash nor a digital euro can simultaneously be used as instruments in themselves to maintain price stability.


INTRODUCTION
The digital euro is no longer a vague concept of a distant future.Like other central banks, the European Central Bank (ECB) is actively pursuing the possibility of complementing euro cash with a digital equivalent, a so-called retail central bank digital currency (rCBDC). 1 The most pressing motive for the issuance of a digital euro is likely to be the accelerating decline in the demand for cash. 2 For over a century, this decline has gone hand in hand with a corresponding rise in private money in the form of sight deposits at commercial banks (henceforth 'deposits'). 3Recent technological, economic, and monetary innovations, 4 and the Covid-19 crisis seem to have reinforced such preexisting trends. 5Some of these multi-layered reasons and motives are briefly described below.
First, a growing number of public law measures restrict or even exclude the use of cash (although being legal tender) 6 and facilitate or require payments by means of deposits. 7For instance, EU Member States participating in the euro financially incentivize transactions by electronic means of payment for the purpose of combatting tax evasion. 8Similarly, Member States with tight financial budgets, in particular, have introduced cash ceilings under the heading of combatting tax offences, money laundering, and the financing of terrorism. 9Even in Member States without such ceilings, cash payments above certain levels require due diligence measures such as Know Your Customer (KYC)-increasingly also seen outside the financial sector-thereby further complicating the handling of cash. 10econd, measures rooted in monetary law may have prompted people to convert cash definitively into deposits.Such measures include repeated cash changeovers with very short exchange periods; 11 the fading out of high value banknotes and placing their use under a sense of general suspicion; 12 and downgrading access to cash services from a legal guarantee to a policy objective 13 or delegating it to the banking sector, whose business model is not based on promoting cash turnover. 14hird, the inherent characteristics of deposits themselves have contributed to an impressive rise in demand in recent decades.Today, their share in M1 (i.e.banknotes and coins, as well as deposits which can immediately be converted into cash or used for cashless payments) ranges from 80 per cent up to more than 95 per cent. 15In addition to the obvious convenience of avoiding physical transfer, storage, and the associated costs and risks of cash, technological innovations are enabling increasingly accessible options for non-cash payments and faster processing, even over long distances. 16Most importantly, however, the amount of deposits is extremely elastic due to the ability of commercial banks to create deposits by granting loans. 17ourth, a decline in tangible cash in circulation may also be due to its increasing use as a store of value, especially in situations of uncertainty. 18In this context, a distinction must be made between hoarding and saving.In macroeconomic terms, hoarding prevents an optimal supply of liquidity to the economy, so that production lags behind its potential.The monetary authority may then, based on its mandate and using its policy instruments, reduce the hoarding ratio, notably by lowering interest rates (even into negative territory).Saving also keeps money out of the economic cycle; however, it would not be appropriate for a monetary authority to intervene by means of financial repression (such as lowering interest rates-even into negative territory-to encourage spending) as additional liquidity would not promote value creation.This is especially the case when there is no output gap or, worse, actual liquidity is allocated currency (UK estimate of EMU aggregate) liabilities to private and public sectors not seasonally adjusted were at GBP 1948.612 billion <https://www.bankofengland.co.uk/boeapps/data base/FromShowColumns.asp?Travel=NIxAZxI1x&FromCategoryList=Yes&NewMeaningId= MF,MFIS&CategId=5&HighlightCatValueDisplay=Monetary%20financial%20institutions>.Equivalent figures were, for example, Sweden 2%, Switzerland 8%.For absolute amounts per OECD-countries see <https://data.oecd.org/money/narrow-money-m1.htm>.The US, with its 40% cash ratio, is only apparently an exception, as most dollar notes are used abroad as a parallel currency and store of value: Federal Reserve, 'Money Stock Measures -H.6 Release' (March 2020), tables 1 and 3 <https://www.federalreserve.gov/releases/h6/current>;Huber (ibid) 9 with further reference: 'The share of cash has risen from 20% (sic) in the 1950/60s in parallel with the USD as the dominant world currency' .16 BIS Committee on Payments and Market Infrastructures (CPMI), 'Fast payments -Enhancing the speed and availability of retail payments' (November 2016) 74 Annex 2 <https://www.bis.org/cpmi/publ/d154.pdf>.In contrast, central banks used to be quite restricted in their money creation due to the gold or gold-forex standard: Huber (n 15).In emerging markets the restriction still exists to date due to the US Treasury bill standard: Junji Tokunaga, 'The Revised U.S. sub-optimally due to structural inefficiencies, for example, when banks or governments keep over-indebted companies with unprofitable business models alive.Finally, shadow banking payment systems, 19 including those with global aspirations and potential such as Facebook's stablecoin Diem, threaten to displace the use of local currency in the form of tangible cash and traditional deposits, respectively, in the near future.Similar to the phenomenon of unofficial dollarization, the public may begin to extensively use foreign (private or public) digital money 20 instead of state-issued banknotes and coins or deposits. 21Moreover, the public may switch to using digital private money without availing of the redemption option again-to the extent that such money offers users a comprehensive ecosystem. 22To forestall migration out of domestic public money, central banks around the world may consider issuing rCBDC.Creating a digital (and thus in many ways more convenient) equivalent of cash for the public is of particular importance to those central banks that aim for global use of their currency, which includes not only the Fed and the Bank of China, but also explicitly the ECB or the Eurosystem, respectively. 23his article discusses from a legal and policy perspective why the developments mentioned above require a response from the monetary authorities in general and in particular from the ECB pursuant to the treaties and the Statute of the ECB and of  the Eurosystem24 (henceforth 'Statute'). 25To this end, in this article we investigate whether the issuance of a digital euro as a digital equivalent of tangible euro banknotes would de lege lata be justified in light of the objectives conferred upon the ECB, the National Central Banks (NCBs), and the Eurosystem,26 thereby enabling these bodies to act. 27We also explore whether non-issuance might affect the future fulfilment of such objectives and thus create an obligation to act for the bodies just mentioned.Throughout the article, we distinguish objectives, measures, instruments, and supporting tasks.These terms are briefly explained and illustrated in Table 1.In this respect, we largely follow Adamski's three-level scheme. 28ccording to that scheme, Level 1 encompasses two overarching European objectives: (1) to stimulate trade and economic cooperation; and (2) to bind societies together to preclude future conflicts. 29Given their strategic nature, these objectives cannot be pursued by instruments in the sense introduced by Tinbergen. 30Rather, they require (political) measures such as the establishment of an economic union, a monetary union, and-ideally-a political union, including a fiscal federation. 31he Level 2 objectives were originally aimed at improving internal market performance, curbing German monetary dominance, and restraining domestic decisionmakers from pursuing self-defeating macroeconomic policies. 32The sovereign debt crisis has reengineered these priorities, merging them into the current single objective of restoring and maintaining the stability of the euro area (in all its economic, financial, social, and political dimensions). 33As far as this, still strategic, level is concerned, the single currency-the euro-has remained an indispensable measure to date: while its introduction was designed to meet the original Level 2 objectives, its continuation likewise promotes the current objective. 34evel 3 relates to the operational level of the Economic and Monetary Union (EMU).Only at this stage are the objectives specific enough so that responsibility and instruments for achieving them can be defined. 35In monetary terms,36 the objective is to maintain stable prices, with monetary policy being the instrument assigned to the Eurosystem37 to pursue this objective. 38We argue, however, that another monetary objective exists in parallel: the availability of ideal monetary objects.This objective likewise requires a suitable instrument for its realization: the issuance of cash, which is mainly the responsibility of the ECB and the NCBs. 39As we will demonstrate, ideal monetary objects and price stability are mutually dependent.Nevertheless, they must remain distinct since the instruments available for achieving these objectives and the related competencies are different.
To this three-level structure, we add the supporting tasks, which are subordinate in nature.They aim to create conditions under which an instrument can achieve an objective in the most effective way, for example, by giving cash certain properties so that it can function optimally as money and anchor, or by structuring the financial market with respect to authorities, market participants, and dissemination media (such as money and infrastructure) in such a way that monetary policy impulses can be effectively propagated.The creation of such conditions is neither an objective nor an instrument in itself, but a mere prerequisite for the instrument's proper implementation and the objective's achievement.
The rest of the article is organized as follows.Section II argues that at the operational level, the Eurosystem (and ultimately the ECB) has been assigned the objective of safeguarding a public good: the availability of ideal monetary objects for the public.Its achievement must be understood as a public service to be provided in the public interest.The instrument used to achieve this objective is the issuance of a monetary object that serves both as money with ideal properties and as an anchor for other monies of the same currency (eg deposits).This role is (still) fulfilled by cash today, in particular by tangible banknotes.As the use of cash declines, however, a digital equivalent-a digital euro-is increasingly required in addition to tangible banknotes to maintain the instrument's effectiveness.This article pursues a technology-neutral approach and refrains from analysing whether such a digital euro should be based on traditional technology or on distributed ledger technology (DLT) and, in the latter case, whether it should have a token-based or account-based design.Rather, we demonstrate in general terms which properties a digital euro should possess in order to perform a complementary function as an ideal monetary object-whatever technology and design might ultimately prove to be the best to achieve these properties. 40ection III demonstrates that a monetary object with the properties and function just described cannot simultaneously be used as an instrument in itself to maintain price stability.Rather, the latter should be achieved using the instrument of monetary policy.In this regard, the issuance of tangible banknotes (and potentially a digital euro) merely qualifies as a supporting task that safeguards an efficient monetary policy and thus the maintenance of stable prices.
Section IV concludes by answering the following questions: can-or must-a digital euro for the public serve as an instrument to accomplish the objectives of (1) having ideal monetary objects available and (2) maintaining the price stability in the euro area?We answer the first question in the affirmative and the second in the negative.

OBJECTIVE: HAVING IDEAL MONETARY OBJECTS AVAILABLE
At the highest strategic level (Level 1), as a measure to achieve economic and social convergence among the Member States, the EMU was gradually established from 1990 onwards.In this context, the decision to introduce a single currency-the euro-was also taken, in order to achieve the underlying strategic objectives of European economic integration (Level 2). 41Having been discussed in theory since the mid-1960s, the exact scenario was finally decided on in 1995. 42elow, we demonstrate that these strategic objectives and measures are also reflected at the operational level (Level 3): the ECB and the NCBs have been given the competence to issue banknotes as an instrument to ensure the availability of the best possible monetary objects-public and private.Before going into detail, however, we briefly explain what constitutes a currency in general and a single currency in particular (section II.1) and describe the essential properties of an ideal monetary object (section II.2).

Currency and its singleness
Currency owes its name to the legal peculiarity that property in money passes with the possession of that money, which is why money soon became to be called current in the sense of negotiability. 43Today, the word 'currency' is mostly used in the sense of the official money of a State or a monetary union that is recognized as such under monetary law-independent of whether any of its monetary objects are attributed the status of legal tender. 44In common English language the term is also used to denote banknotes and coins, ie the official monetary objects. 45or a currency to come into existence, at the very least the name of the currency,46 its unit(s) of account (or currency units), 47 and monetary object(s) must be defined and used to measure and express monetary value.The name designates the currency, while currency units describe the value ratio between the main unit and sub-units (eg euro and cents).In the past, currency units also had to determine the value ratio between themselves and the material used to create the monetary objects (eg in the case of a precious metal currency, the fineness of the metal).With the advent of fiat currencies represented by monetary objects without intrinsic value, the latter aspect became obsolete.Finally, monetary objects fulfil the commercial need to make monetary value perceptible and usable for storage and transfer through suitable forms.For this purpose, numerous types of monetary objects have been developed that represent a combination of a currency unit and quantity, among them tangibles and intangibles, such as symbols and records made from shells, gold, paper, and bytes, for example.
Accordingly, article 2 of the Regulation on the introduction of the euro48 sets out that the currency name of the participating Member State is the euro, while the currency unit is one euro divided into one hundred cents.The denomination and technical specifications of banknotes are to be defined by the Governing Council of the ECB,49 whereas the Council is authorized to lay down these parameters with respect to coins. 50he best starting point from which to describe a single currency is probably the fact that in a given area, all monetary objects issued by the public sector are expressed in identical units of the same name.Among the Member States participating in the EMU's 'M' (the monetary union), this was achieved by replacing their national currencies with a new currency: the euro.In the long term, however, an alignment limited to the names, currency units, and monetary objects of sovereign issuers would not be sufficient.
Singleness-in the sense in which it is understood here-goes much further.It assumes that the clear majority of the money supply used in a monetary area, including private monetary objects, has the same name(s) and unit(s) of account and that all are exchanged at par.It is unlikely, however, that such singleness across nations will ever emerge and persist naturally.Hence, a single currency also requires a common institutional framework, that is, the adoption of common rules and the designation of common authorities to ensure the aforementioned characteristics of the monetary objects and to foster their widespread use as a means of payment, a store of value, and a unit of account.

Properties of ideal monetary objects in particular
There is a set of selected properties that make a monetary object particularly attractive, thus promoting widespread use.If a monetary object includes these properties, the public will automatically use it as money, that is, to pay, save, and calculate.Consequently, all other monies must be oriented towards this optimum to avoid the risk that the public will prefer the ideal money-the latter thus also serving as an anchor. 51he properties just described make a monetary object particularly suitable to serve both as money for the public and as an anchor for other monies of the same currency.Ideally, in terms of access, these properties include smoothness (ie security in balance with effectiveness), inclusivity, and privacy, while in terms of value, ideal monetary objects should be risk-free and uniform (ie circulating at par).Depending on an economy's needs and preferences, more or less auxiliary properties may also exist. 52

In terms of access: secure, efficient, inclusive, and privacy-preserving
A monetary object's basic function is to make monetary value certain-that is, technically and legally perceptible in a way that is attributable, permanent, authentic, and has integrity (especially fraud resistance).Attributability relates a monetary value unambiguously to the issuer and the holder; permanence makes it reproducible independent of place and time; authenticity proves the issuance by the authorized legal subject; and integrity excludes any unauthorized change (falsification, disposal).At the same time, the smooth use of a monetary object must be guaranteed. 53In other words, efficiency must be optimized in compliance with the security and resilience requirements mentioned above.In particular, it must be ensured that state-of-the-art and innovative technology is used and that the transfer is scalable, instant, final, and as direct as is feasible. 54oreover, an ideal monetary object should be made as inclusive as possible.This implies that it must be cheap and (technically) easy to use without the need for a bank account or specific knowledge and that access is granted to the public at large. 55Finally, in a market economy, practically all areas of a society and the lives of its individuals are interwoven with the use of currency.Accordingly, the protection of users' privacy in their dealings with a monetary object is of paramount importance.At the same time, it must be balanced with the need to prevent and sanction money laundering (antimoney laundering (AML)) and the financing of terrorism (countering the financing of terrorism (CFT)).However, research regarding central bank digital currency (CBDC) to date has only occasionally taken account of the fundamental need for privacy. 56

In terms of value: risk-free and uniform (circulating at par)
Regarding their value, ideal monetary objects must have two particular properties: they must be kept as risk-free as possible and must ensure the uniformity of the money.
Freedom from risk Freedom from risk is an essential property of a monetary object because it ensures that a monetary object will be accepted at its face value.It thus fosters the use of a monetary object as a means of payment, a store of value, and a unit of account.Without risk freedom, the market would only accept a monetary object at a discount, thereby reducing the real value in comparison with the nominal value by the risk premium.This in turn would cause severe frictions because the risk of a monetary object would have to be assessed (or at least its price in the market checked) before each payment, thus making the use of this monetary object less attractive.However, risk freedom not only provides that a monetary object can be optimally used as a means of payment.Risks are mostly felt in the medium and long term, and therefore, they have a particularly negative impact on a monetary object's store of value function. 57However, it shall be recalled that money differs from simple means of payment precisely in that it is likewise suitable for storing value. 58As a result, monetary objects that are ideal and thus used as money by the public must be equally suitable for both functions.
Which risks impede risk freedom and how can they be offset?The focus is clearly on minimization of potential inflation (or deflation).To this end, modern monetary authorities are regularly entrusted with the objective of keeping prices stable.According to the definition that the ECB's Governing Council adopted in 1998 and refined in 2003, such price stability is achieved if the year-on-year increase in the Harmonized Index of Consumer Prices (HICP) for the euro area is below but close to 2 per cent in the medium term. 59Hence, price stability is the Eurosystem's primary objective when conducting its monetary policy. 60In addition, however, the maintenance of price stability is also a supporting task with regard to the optimization of domestic monetary objects because it prevents the ECB and the NCBs from over-issuing monetary objects, thereby improving their risk freedom (in terms of purchasing power risk and exchange rate risk). 61This shows the complementarity of the two objectives of ideal monetary objects and price stability.
Moreover, the risk of insolvency and illiquidity of the issuer must be mitigated as far as possible.Today, the monetary objects issued by the state come closest to this ideal: coins, banknotes, and reserves no longer give their holders the right to demand the delivery of any of the issuer's assets.They have therefore lost their debt claim nature 62 and with it the associated risk of default.Similarly, the central bank can theoretically issue additional banknotes or reserves at any time-thus marginalizing the liquidity risk as well.Unsurprisingly, state-issued banknotes circulate at their face value, which distinguishes them from some private banknotes of the past. 63owever, most monetary objects today consist of deposits.By their nature, deposits are individual private entities' debts.They are backed with the asset side of the issuer's balance sheet, with the latter containing a substantial share of individual credit claims with incongruent maturities, thus entailing liquidity and credit risks.In light of the above, this should reduce the real value of deposits (by causing risk premia when used for payments).Nowadays, however, this is at least significantly reduced by a set of levelling factors, which largely mitigated the risks, at least in times without financial and other crises.In the following paragraphs, we will examine two important groups of levelling factors: prudential and financial.
The first group covers the prudential field, which encompasses regulation, authorization, and supervision. 64The Union has adopted numerous legislative acts to coordinate and approximate national provisions on banking regulation based on articles 53 and 114 of the Treaty on the Functioning of the European Union (TFEU).Today, the regulatory framework prescribes ratios for liquidity, capital, reserves, and leverage as well as standards for accounting and disclosure.It addresses payment finality, recovery, resolution, supervision, and authorization requirements for credit institutions. 65All these factors are designed to ensure risk freedom in that they minimize the build-up of risks, in order to prevent their materialization or at least to mitigate their consequences on deposits. 66he second group comprises various types of financial assistance, designed to serve as a last line of defence if risks materialize despite all prudential safeguards. 67While a lender of last resort (LoLR) can bridge illiquidity, 68 (deposit) guarantee schemes take effect in the event of insolvency 69 or to prevent a bank from entering resolution or insolvency. 70However, all these types of aid imply moral hazard, and they ultimately remain imperfect.It is often impossible to decide in time whether an ailing entity is illiquid or (already) insolvent.Therefore, a bank might hope to be kept on a LoLR lifeline even if its economic conduct requires resolution.Moreover, deposit guarantee schemes are insufficient to deal with large, let alone systemic, banking crises.
Uniformity of money Finally, aside from risk freedom, the so-called 'uniformity' of money also optimizes monetary objects.Uniformity of money implies that all monetary objects of the same currency circulate at par. 71This is critical, since it is common for several monetary objects of the same currency-public and private-to coexist within an economic area.Proof has yet to be provided that legal prohibitions adopted in response to the bail-outs during the latest financial crisis will be observed in the future.68  Ideally, all monetary objects would perfectly fulfil the risk freedom requirement, so that the uniformity of money would automatically be ensured.However, this is not the case for deposits, in particular those that contain a default risk of the issuing bank-despite the aforementioned (prudential and financial) levelling factors. 72Only by means of a third factor do they actually come close to the ideal of uniformity: monetary systems are usually organized around an anchor, 73 with the monetary object closest to the aforementioned risk freedom acting as the anchor.
The anchor function emerges when, due to market needs for greater convenience, the most risk-free monetary (but otherwise inconvenient) object is increasingly immobilized, while another, secondary 74 monetary object of the same currency that consists of a claim 75 to the immobilized object is circulated instead.Until the last century, for example, gold coins served as an anchor for the lighter and therefore more convenient privately issued banknotes that were to be redeemed in gold.Today, the banknotes of a central bank that are free from the risk of insolvency have taken over the role of anchor.They are, however, circulating less and less, while the digital-and therefore now more convenient-deposits that can be redeemed in such notes are increasingly circulating in our economy.
If secondary monetary objects are fully and immediately convertible into the anchor, they also replicate the store of value and unit of account properties of the anchor.Although such anchors may take many forms, among them a commodity (like gold or silver), nowadays it typically consists of fiat money issued by the central bank-thus well deserving of the name 'base' money, in the literal sense.Deposits are secondary monetary objects as just described, 76 in that their claim nature grants on-demand convertibility into central bank money, thus ensuring parity between deposits and fiat money. 77In the public's perception, the uniformity of different banks' deposits is assured, because all deposits are convertible into cash at par value.Among the banks, the mechanism is similar: they typically 78 settle mutual claims (eg arising from a client payment) using reserves, thereby abolishing the credit risk and removing the liquidity risk. 79Hence, what ultimately levels these monetary objects and makes them fungible is the demandability clause and the trust placed in the promise that a deposit will be converted on demand to the liability of another commercial bank or money issued by the central bank. 80

Potential auxiliary properties such as being legal tender
Finally, auxiliary properties may be implemented to promote a monetary object's use.These traditionally include the sovereign's practice of paying off its own debts in this money, charging and collecting its taxes and other public financial duties in the money it has issued, or imposing the use of a currency for payments between (selected) private parties. 81The state ratio further increases the amount of money used, while the (tax) debt burden as well as compulsory or default use guarantee a basic demand.
The most significant example of such rules of compulsory or default use of money is the practice of designating an object of money as legal tender 82 -for example, as in the third sentence of article 128(1) TFEU for banknotes. 83Originally, the status of legal tender was primarily a means of securing the demand for the money issued by the sovereign (earning it seigniorage and inflationary gains).This is evident from the fact that the stricter and more punitive the legal tender rules are, the more tense the state's fiscal situation will be. 84oday, the legal tender status may still provide some legal certainty in payment transactions as a default standard.However, it is not a mandatory property of ideal monetary objects.This is shown by the very fact that in recent decades, governments have continuously softened their own legal tender rules via exemptions to the advantage of private electronic means of payment, ostensibly to guarantee public safety. 85Remarkably, this promotes the use of deposits and thus the money of those issuers who have long since become significantly more important buyers of government debt (including first instance buyers) than central banks.

Market failure as the main reason for state intervention
In deciding who should be authorized to issue monetary objects, a sovereign ultimately has three options. 86First, it can leave it entirely up to the market to create appropriate monetary objects in response to demand and allow these monetary objects to compete against one another.Second, the public sector may claim a monopoly on the issuance of all monetary objects (sovereign money).Under the third option, public and private financial objects may coexist.
This third option is established in market economy practice, including in the EU.The stock in the euro area is composed of both public and private monetary objects.Public monetary objects pertain to monies issued by the public sector, including coins 87 and banknotes for the public 88 as well as reserves (ie balances in accounts held with the central bank by selected (financial) market participants). 89Private monetary objects mainly include deposits issued by commercial banks and e-money issued by non-bank financial institutions.For the last century at least, tangible banknotes in particular have performed the function of what has hitherto been described as an ideal monetary object, and the same is true for euro banknotes since Stage Three of the EMU.
Before taking a closer look at the statutory division of competences, we will first examine the underlying factual reasons.That is, we will discuss why it should necessarily be a public authority that is tasked with the issuance of ideal monetary objects and why this task cannot be left to the market in general or to commercial banks in particular.
The first reason concerns network externalities with regard to the payment function of monetary objects.Nowadays, the latter consist mostly of deposits issued by commercial banks.A dense prudential network has been created over several decades to ensure their stability. 90However, these prudential requirements are associated with enormous sunk costs for market entry and lead to cost subadditivity.Because every supplier must bear these costs, the total costs for several suppliers are higher than those for a single supplier.At the same time, suppliers with growing market share benefit from economies of scale and scope-with growth eventually becoming self-reinforcing: the larger a payment community becomes, the more attractive the use of a particular payment 85 A telling example is the case mentioned in n 55. 86  network also becomes for already existing users. 91The resulting market concentration leads to natural monopolies (or oligopolies with high sunk costs), 92 thus preventing new firms from entering the market, stifling innovation, and making it unnecessary for the dominators to internalize social costs and enticing them to charge unjustifiably high fees for their services. 93 second reason relates to deposits' store of value function.Because retail users cannot assess and compare the quality of bank balance sheets, they accept equally (low) interest rates independent of the specific bank's risk profile.In addition, retail depositors usually neither require collateral nor withdraw large parts of their holdings at once. 94Consequently, again as an undesired externality, banks that take higher risks benefit from the confidence that more conservative banks create with respect to deposits.Conversely, conservative banks may adjust their risks to the interest rate (which might in extremis lead to a so-called 'lemons problem' that describes the phenomenon according to which the quality of a good traded on a market can decrease in the case of information asymmetry between the supply and demand side).This momentum is accelerated by the fact that, as described above, possible financial assistance has created a high potential for moral hazard.Likewise, the introduction of fast payment services will not suffice, 95 as this only improves the payment landscape but fails to address the public's need for and right to a credit-risk-free store of value.
Finally, the financial market is characterized by genuine agility.Therefore, the mechanisms described above cannot be dealt with by regulation alone.Regulatory procedures are too slow and complex, and their outcome is too rigid to fully cover future development.Besides, regulation often has unforeseen adverse side effects and ties up resources into forces for monitoring and enforcement that could otherwise be deployed more productively. 96n light of the above, the competence for the issuance of ideal monetary objects intended to serve as money for the public and as an anchor for private monies must be entrusted to a public authority.However, the government and any agency dependent on it would not be appropriate since these bodies pursue fiscal interests in the first place.Rather, all activities safeguarding the best possible quality of money 97 have to be assigned to an independent public entity.
Making ideal monetary objects available must be one of the entity's primary objectives.The best possible fulfilment of this objective must not serve the entity's own interests or those of any stakeholder, but those of its money's users.In other words, the issuance must be understood as (and exclusively delegated under the principle of) being a public service provided in the public interest to ensure the availability of ideal monetary objects as a public good.Experience has shown that an independent entity under private or public law (or a mix) endowed by a democratic legal act with an objective in this sense is best placed to fulfil this objective-which is typically the case for modern central banks. 98The next section will show that the competences within the Union have been assigned in conformity with these considerations.

Distribution of competences in the euro zone
The implementation of Level 1 and Level 2 measures relating to the monetary areathat is, the establishment of EMU and the introduction of a single currency-required the delegation of monetary sovereignty from the Member States to the European Union through the Maastricht Treaty. 99At Level 3, both the objective of maintaining price stability and the instrument required to achieve it (ie the definition and implementation of monetary policy) are explicitly provided for in the treaties, including the associated competencies. 100By contrast, with regard to ideal monetary objects, only the instrument (ie the issuance) is explicitly set out in the treaties while the objective (ie the availability) is not.We will first briefly outline the reason for this before concluding this section with an overview of the distribution of competences relating to the instrument (ie the issuance of cash).
Two reasons were presumably responsible for the fact that the objective of having an ideal monetary object available was not explicitly mentioned in the treaties.First, as we will demonstrate, the representatives of the Member States involved in drafting the treaty directed their full attention toward the division of responsibilities among themselves.Conversely, there was no specific incentive to think thoroughly about state issuance of money as such, since second, due to its long tradition, the state's money issuance was not disputed in principle and therefore required no in-depth justification.
However, as shown above, the availability of state money in all modern monetary jurisdictions is not a random historical remnant.Certainly, fiscal interests may originally have motivated states to become involved in this area.But the fact that they were able to maintain their position as issuers is not due to sovereign powers alone (as a 97 Such activities comprise, in particular, the definition of issuing conditions and the authorization of issuance by all other public bodies.98 See eg Lastra (n 25) para 7.33, referring to the privilege of note-issue as the central bank's core task.Bossu and others (n 35) 14. 99 Article 3a(2) TEU (Maastricht Treaty). 100 See below section III.
Downloaded from https://academic.oup.com/jfr/article/7/2/284s/6375131 by Juridische Bibliotheek Der UU/University Library Utrecht user on 23 December 2021 strict state theory of money might lead one to believe).Rather, state money for the public has proven to be an indispensable anchor, to which all private money must be oriented-provided that the state money has the essential properties described above and is therefore actually widely used by the public.Admittedly, the treaties only mention the instrument (the issuance of money), but not its underlying objective (the availability of ideal monetary objects).Nevertheless, this objective-the public service of making available ideal monetary objects as a public good-has existed for a long time.It was initially the responsibility of each individual NCB.Since Stage Three of the EMU, it has been the responsibility of the ECB, the NCBs, and the Member States.These three players are involved in the issuance of public money (ie the instrument) according to an intricate distribution of competences established in the treaties.
Article 128(1) TFEU gives the ECB exclusive competence to authorize the issue of euro banknotes within the Union101 and empowers the ECB and the NCBs to issue such banknotes. 102Article 128(2) TFEU provides that the volume of the issue of coins by Member States is also subject to approval by the ECB.Consequently, the ECB was given control over the entire volume of cash supply, or rather, the supply of all public monetary objects intended for use by the public.
Accordingly, the NCBs' competence to issue is merely derivative, subject to the ECB authorization. 103Coin issuance remained a competence of the Member States, since it traditionally belonged to the state and coins were deemed to be of minor monetary importance in any case104 -yet again dependent on the ECB's authorization of the quantity. 105Against this background, the then President of the ECB rightly rejected the Estonian government's request to issue an Estcoin as contrary to article 128 TFEU. 106oreover, the second and third sentences of article 128(1) TFEU, in conjunction with article 16.2 of the Statute, 107 reveal that the ECB may authorize other entities (eg commercial banks) to issue banknotes.These banknotes would, however, lack legal tender status.
This wording was chosen to allow for the Governing Council to permit the continuation of UK traditions, 108 had the UK not negotiated an opt-out clause regarding the euro.However, the concession granted in article 16.2 of the Statute does not reach the quality of a competence. 109Rather, it is a right to request, with the ECB responsible for upholding the request if it is compatible with its policy.Moreover, the scope of article 16.2 of the Statute is relatively marginal: when exercising its competence, the ECB must respect Member State practices.However, the provision clarifies that only existing practices regarding the issue and design of banknotes may be retained and even these only as far as possible-that is, to the extent that the objective of price stability will not be compromised. 110

A legal and policy evaluation of a digital euro as an ideal monetary object
For over a century, cash-particularly in the form of banknotes-has simultaneously served as money for the public and as an anchor for deposits and other private monies.However, the declining importance of tangible banknotes in an increasingly digitized society means that, beyond a future tipping point, this will no longer be the case.Therefore, tangible cash must be supplemented by a modern, digital equivalent-the digital euro.However, the above applies equally to such a digital equivalent to cash: its issuance cannot be left to market participants.Rather, the ideal possible interplay between public and private actors must be identified without compromising the exclusive liability of the central bank.

Serving as money for the public
The unique selling point of digital cash issued by the central bank is first and foremost its almost ideal risk freedom and, more specifically, the absence of insolvency risk.This property has only fully come into play since central bank money has become fiat money. 111Similarly, only if a central bank acts as the issuer will digital cash approach the access-related properties described above (ie security, efficiency, inclusiveness, and safeguarding of privacy).This is due in the first instance to the central banks' mandate, which must be fulfilled in the public's best interest and, second, to the fundamental rights that central banks, as public institutions, must respect.Third and finally, the financial independence granted 108 According to which a hand full of commercial banks in Scotland and Northern Ireland still issue their own banknotes; see van den Berg (n 83) 326, 339-41.109 According to materials, it is more than a mere '(non-binding) Declaration': van den Berg (n 83) 339.110 Under these premises, the UK could have requested that the Queen's head be retained on one side of the euro banknotes issued by the Bank of England-the second motive behind Britain's push for the adoption of article 16.2 of the Statute; see van den Berg (n 83) 339.111 For as long as central bank money was still structured as a claim for a certain collateral, it was possible for any private entity to issue its own banknotes structured in the same way.To prevent this from happening, it was necessary to have a statutory banknote monopoly.Today, that would no longer be necessary; since only central bank money is free of insolvency risk, it already benefits from a natural monopoly in this regard.The question raised by Bossu and others (n 35) 36 as to whether central banks should be granted a monopoly for issuing digital currency (to the public) therefore does not necessarily need a legal answer.to central banks enables them to fulfil these obligations to the best of their ability.
The ECB and NCBs are self-financed from the proceeds of their foreign and monetary reserves and seigniorage and enjoy budgetary autonomy, meaning that, although the law requires an efficient allocation of resources,112 they are not obliged to maximize profits for delivery to the state. 113n relation to the Eurosystem, this means that the ECB would only issue a digital euro and authorize its issuance by the NCBs if its design and infrastructure were set up such that the digital euro remained on the liabilities side of the issuing central bank's balance sheet and if its security were ensured.Failure in the latter respectthrough fraud, hacking, operational deficiency, systemic disruption, or other tail risksinvolves enormous social costs.The ECB and NCBs would be obliged to internalize these costs, above all, by taking and funding preventive and contingency measures 114 aimed at avoiding or overcoming the realization of such risks.Likewise, the ECB and NCBs would have to opt and pay for an infrastructure and design that allow for the most efficient use possible: a digital euro must discharge debts instantly and with finality, allow convertibility at par with tangible cash, and offer standardized front-end solutions and interoperability with private payment solutions. 115Further, the ECB and NCBs would have to ensure that a digital euro is non-discriminatorily accessible to all segments of the euro area's population, easy to use even for unskilled persons, free of charge for basic services, and generates very low costs for other services, thus supporting financial inclusion. 116 digital euro issued by the ECB and NCBs must also be designed in compliance with users' fundamental rights to privacy as recognized by article 8 of the European Convention for the Protection of Human Rights and Fundamental Freedoms (ECHR), the right to respect for private and family life and the right to the protection of personal data as recognized, respectively, by articles 7 and 8 of the Charter of Fundamental Rights of the European Union, 117 and the proportionality principle. 118Any interference with these rights requires justification in accordance with article 52(1) of the Charter: it must be provided for by law and, while respecting the essence of that right and subject to the principle of proportionality, it must be necessary and genuinely meet objectives of general interest recognized by the Union. 119Therefore, a digital euro will have to adequately protect the privacy of the information that is processed in association with its use. 120Insofar as data are recorded (eg for authentication purposes), it must be technically ensured that they are either deleted immediately afterwards or used in a privacy-preserving way-only subject to coercive measures against the data subject permitted by court. 121onversely, a digital euro issued by market participants would not be credit risk-free from the outset.Moreover, private actors, by their very nature, are generally stakeholderoriented, self-serving, and profit-making institutions.While not wrong in itself, this has undesirable consequences in the monetary area, owing to a combination of reasons that cannot be effectively contained by policy measures, thus ultimately leading to market failure: in order to make short-term profits, private actors may be tempted not to internalize security-related social costs in advance. 122Moreover, their willingness to offer inclusive solutions for non-profitable actors (particularly in the absence of a state 'competitor') has also proved to be limited. 123Finally, private business models are increasingly based on the generation of profits from marketable data with relatively poor opt-out options for users. 124

Functioning as an anchor
If a digital euro issued by the ECB and the NCBs were to complement tangible banknotes, it could also support the latter in their anchor function or, as a last resort, could even replace them.This is essential for the uniformity of money for two reasons. 125irst, depositors get a sense of control when, thanks to public money, they are able to withdraw their deposits from a bank whose solvency they doubt. 126However, this sense of control extends even further, since, unlike when deposits are withdrawn by transfer, cash-out allows depositors to leave the banking system entirely if they experience doubt about systemic stability.This option might be used in times of uncertainty, as demonstrated by the fact that after the collapse of Lehman Brothers, the Bundesbank alone issued as many EUR 500 banknotes in a single month as it had in the entire preceding year. 127 digital euro would offer the public an alternative course of action.With dwindling cash, this is critical, as even a shift towards euro AAA government bonds would not be equivalent.Only tangible banknotes-or digital euros-are of such a nature that they can be used at any time both to retain value without credit risk and to make payments.As behavioural studies have demonstrated, people's willingness to (continue to) expose themselves to risk increases as they have (or believe that they have) more control over an event. 128econd and most importantly, a digital euro would have a disciplining effect on banks similar to that which tangible cash has today.Unsustainably managed banks must expect depositors to withdraw their deposits. 129Conversely, if depositors-for lack of cash or a substitute-could only make transfers, this preventive effect would be far weaker because depositors then would have no equivalent alternative.Above all, however, deposits would change from a claim nature to a de facto fiat money for the public because conversion could no longer be demanded for lack of cash.Different issuers' deposits would enter into competition with one another for the vacant anchor function.This might result in a tendency for the entire banking sector to gradually over-extend credit 130 in that even poor debtors' credit demand would be met and asset bubbles financed despite the aforementioned prudential regulation. 131Over time, this would negatively impact the stability of the financial system that is needed for the implementation of monetary policy. 132

OBJECTIVE: KEEPING PRICES STABLE
This article has proposed that the digital euro may be instrumental in the ECB's achievement of its objective of making ideal monetary objects available.In this section, we address the question of what role the digital euro is to play with a view to the ECB's objective of maintaining price stability.

Objective and instrument to achieve price stability
Today, price stability133 is recognized as an inalienable public good, 134 and the treaties accordingly assign paramount importance to this objective (article 127(1) TFEU). 135he main instrument for achieving stable prices is the definition of monetary policy and its conduct for the Member States whose currency is the euro (article 127(2), first indent, TFEU, mirrored in article 3.1 of the Statute).
For the implementation of monetary policy, a so-called 'transmission mechanism' is required, which today is deployed over several stages. 136In the beginning, a monetary policy decision is made (eg to help to close a production gap in the real economy).To implement this decision, the ECB modifies the conditions for an appropriate monetary policy operation to be conducted with counterparties accordingly (eg it lowers the repo rate).Such adjustments ultimately increase or decrease the counterparties' reserves 137 and thus indirectly influence the conditions under which they lend and borrow money in financial markets. 138This passes through to changes in the interest rates and prices of financial market assets.Ultimately, via a range of further transmission channels (eg the bank deposit and lending rate, but also the real interest rate, expectations, etc), the financial market's movements pass through to the real economy.In our simplified example, it should ease the conditions for financing for additional production in order to meet the demand that would otherwise have led to an undesired price increase. 139 Supporting tasks However, not all obligations incumbent on the Member States and the Union, which are ultimately indispensable for achieving price stability, qualify as instruments themselves.For instance, this is the case with the duties to secure sound public finances and a sustainable balance of payments: 140 they merely serve as supporting preconditions in this context.As mentioned in the Introduction, the creation of such conditions is neither an objective nor an instrument in itself but is merely a prerequisite for the proper implementation of an instrument (here: monetary policy) and the achievement of an objective (here: price stability).
The same is true for the supporting elements mentioned in article 127 TFEU that are essential to the implementation of monetary policy to guarantee stable pricesin particular, an institutional framework,141 stable counterparties in a stable market, a single currency, and an effective payment infrastructure.They are each a prerequisite for the implementation of successful monetary policy.Their essential characteristics are outlined below, and the associated competencies are subsequently described.142

Contributing to stable counterparties in a stable market
The central bank needs counterparties with whom it can enter into contractual operations and who will propagate the impulses thus created within the framework of a free market economy.Today, banks assume a cardinal role as counterparties in the transmission of monetary policy. 143In addition, related operations on the wider financial market are also of increasing importance.In any case, the monetary policy transmission mechanism requires both financially sound credit institutions and an overall stable financial market.This is clearly reflected in the changing role of central banks, whose mandate is increasingly expanded towards financial stability.144

Preserving a single currency
A currency in which the monetary value of all kinds of economic goods and services can ultimately be expressed is required.To this end, the currency is also used in operations with the counterparties, as outlined above. 145However, monetary policy presupposes a single currency, which must exhibit the elements identified in section II of this article: a name and unit(s) of account as well as monetary objects (one of which serves as base money to the public and as an anchor for private monies).This is because the need to manage several currencies simultaneously would severely impede monetary policy.An example of this was provided by the market when it began to price the bonds of various euro-Member States as though they were Deutschmark-euro, drachma-euro, etc in 2010.

Promoting a payment infrastructure
The final essential precondition in support of monetary policy to be addressed here are effective dissemination media-above all ideal monetary objects and an effective payment infrastructure. 146By itself, the issuance of central bank money would be futile.Only if the management of circulation is likewise ensured can the monetary objects fulfil their intended functions-that is, to serve as money and anchor in the case of cash and as a settlement and monetary policy prerequisite in the case of reserves. 147owever, smooth operation does not merely require infrastructure.Ultimately, smoothness can only be optimally achieved if central bank money is used as a means of payment to avoid operational, credit, and liquidity risks related to private monies and the frictional costs that they incur.For this reason, today's monetary policy operations are conducted via balances in reserve accounts held by commercial banks with their central bank. 148We would not go as far as to say that therefore 'reserves are also a monetary policy tool' . 149Rather, the actual tool is the terms and conditions under which the central bank concludes operations with its counterparties (ie the commercial banks), thereby increasing or reducing (sterilizing) reserves or remunerating them. 150ven if reserves are charged negative interest rates, only the latter serve as a tool, while the reserves themselves remain a mere-though essential-dissemination medium like the infrastructure itself. 151

Competencies concerning price stability
The maintenance of price stability is the Eurosystem's primary objective (article 127(1) TFEU). 152While the Member States and the Union must likewise ensure compliance with the principle of stable prices (article 119(3) TFEU), the primary responsibility clearly lies with the Eurosystem. 153This is evidenced by the fact that, on the basis of article 3(1)(c) TFEU, the Union has delegated to the Eurosystem the main instrument for achieving the price stability objective-monetary policy-or rather its definition 154 and conduct for the Member States whose currency is the euro (article 127(2) first indent, TFEU, mirrored in article 3.1 of the Statute).
In addition, the Eurosystem is entrusted with the supporting tasks just mentioned. 155Not being instruments in themselves, their fulfilment is nevertheless a prerequisite for the effective conduct of monetary policy.This refers in particular to the 'basic tasks' set out in article 127(2), second indent, and 128 TFEU.Yet, it also includes the contributions to the prudential supervision of credit institutions and the stability of the financial system required by article 127(5) TFEU.
In principle, ensuring stable financial markets is a core objective for other institutions.Nonetheless, the Eurosystem's contributory responsibility and competence in this regard is due to the fact that policy transmission is dependent on a stable financial market and market participants suitable to serve as counterparties in central banks' monetary policy operations.Consequently, the Eurosystem's financial stability measures must be conducive to maintaining price stability and should not go beyond what is needed to achieve this objective. 156y the same token, while the issuance of banknotes as set out in article 128(1) TFEU is another basic task for the objective of making ideal monetary objects available, it is merely a supporting task with regard to the objective of maintaining price stability.As a supporting task, it aims at creating an environment in which monetary policy can best unfold its effects.For instance, the anchor function ensures the uniformity of money and thus the creation of a single currency through which monetary policy can be transmitted with as little friction as possible.Hence the complementarity between these two operational objectives and their respective instruments and preconditions: just as the stability of the currency is an indispensable prerequisite for the singleness of a currency, 157 a single currency is presupposed in order for monetary policy to keep prices stable effectively.In conclusion, the Eurosystem's banknote issuance prepares the ground for an effective monetary policy.
To support effective monetary policy transmission, the fourth indent of article 127(2) TFEU, as mirrored in article 3.1 of the Statute, further requires that the Eurosystem promote the smooth operation of payment systems. 158Article 22 of the Statute sets out that the Eurosystem may 159 provide facilities and regulations to ensure efficient this status quo by preventing migration out of the currency,166 particularly if the use of euro banknotes declines. 167If, instead, private euro monetary objects alone had to cope with this task, the disappearance of the anchor would weaken these monies' quality as well as the stability of the issuing entities in the medium term. 168onetary policy would be impaired if prices and wages were quoted increasingly in non-domestic currencies due to the growing use of foreign or private (digital) monetary objects.For instance, where foreign currency is widely used, prices and wages would remain relatively unaffected if the Eurosystem were to try to influence the exchange rate to accommodate monetary conditions in times of adverse macroeconomic shock. 169esides, it is particularly questionable whether parity could be maintained between deposits and central bank money with only clearing and settlement in reserves. 170ven if the view that it could were to prevail, however, it would be too short-sighted: an effective monetary policy requires sufficient transactions with reserves (reserve turnover) and a real economy that quotes the bulk of its prices and wages in local currency.Reserve turnover is needed because the central bank steers the condition of its provision and sterilization by transacting with its counterparties, the commercial banks. 171This amounts to an attempt at pushing a rope, metaphorically speaking, if monetary policy counterparties neither demand new nor use their existing reserves.However, this precise situation could arise if the public were to make fewer and fewer payments in euro.In that case, not only would the demand for bank loans in euro decline, but so would all interbank customer payments, thus reducing the banks' need for clearing and settlement euro reserves.Even prudential liquidity requirements could not stabilize the quantum of reserves required, as the latter is based on the expected future outflow of deposits (again depending on the demand for euro).In brief, a digital euro would prevent such a reserve turnover collapse.
To avoid both such scenarios, the public in the euro area should be provided with a digital euro that is sufficiently attractive, as outlined above, 172 to prevent or reduce the public's switch towards funds other than euro.Therefore, the digital euro should be designed in a cash-like manner with no variable features-that is, as a so-called 'autonomous factor' .As in the case of tangible banknotes, the amount issued would not be controlled by the ECB but would be based on public demand. 173Designed in this way, the digital euro would help safeguard the monetary policy transmission mechanism without altering the mechanism itself.

Improving the provision of information to the monetary policy authority
Depending on its design, a digital euro-or rather, digital euro transactions-could serve as an additional source of information for the central bank.As such, it could help maintain or even enhance the Eurosystem's ability to collect financial data in real time. 174However, this could be at most an auxiliary reason for the introduction of a digital euro.Moreover, the possible advantages of such a design might be outbalanced by considerable risks. 175Therefore, we will not investigate this option further in the present article.

Becoming a medium of monetary policy transmission itself
In theory, a digital euro could also be used as a medium that disseminates its own monetary policy impulses.To this end, it should be designed to have variable features.The most important variable feature would be the possibility to pay or collect interest on digital euro holdings.Another obvious possibility would be the introduction of limits on such holdings-whether limits per person, per transaction, or overall, and as an alternative to or in combination with interest.This would allow the central bank to influence the public demand, 176 for example, via an interest rate charged or paid.Several economists and legal scholars would welcome a digital euro designed in this way, 177 as it could significantly broaden the central bank's policy options-both in terms of the policy rate and the monetary aggregate itself.
Proponents justify such an opinion as follows: an interest-bearing digital euro might make monetary policy more effective through improved pass-through of policy rate changes, influencing the conditions under which liquidity is available. 178This is because, if the central bank raises both its policy rate and interest rates on a digital euro, banks would also be forced to raise interest rates179 if they wish to prevent their clients from converting deposits into digital euros. 180By the same token, a negative interestbearing digital euro could potentially help remove the effective lower bound (ELB)181 constraint-although only if cash were simultaneously abolished or made costly. 182oreover, it is feared that the ELB would climb to close to zero if a digital euro were interest-free, since monetary policy counterparties might then opt to hold digital euros rather than reserves. 183Thus, the Eurosystem could no longer apply negative interest rates (discussed below) as part of its monetary policy. 184 digital euro would also enable the public sector to make swift and direct payments to the public, thereby increasing available liquidity without having to resort to interest rate policy.Such payments could either be made by the government and thus paid out of tax revenues and other public funds or distributed for free by the Eurosystem members.Their purpose may vary, including, for instance, aggregate demand stimulus or the provision of emergency cash to distressed households and businesses to relieve hardship caused by extraordinary events or even a built-in expiration date to spur spending. 185s tempting as these new options may appear at first glance, they do not outweigh the numerous disadvantages and concerns associated with a euro with variable features.Some of these are general and others are directed specifically against negative interest rates, while yet others refer specifically to the extraordinary injection of money.
To begin with, it is 'not clear that the pass-through of the policy rate needs strengthening' at all. 186Moreover, it would not be compatible with a free market economy for the central bank to impose interest rates as a sovereign act.For this reason, central banks use open market operations and standing facilities to fix interest rates, with counterparties free to enter or not enter into contracts.Therefore, it would be equally objectionable to attempt to achieve this effect through indirect means, such as by authoritatively setting an interest rate for a digital euro, which would then force commercial banks to adjust their interest rates accordingly.
Further, negative interest rates are tantamount to taxation, at least in economic terms. 187The rule that any tax must have a firm basis in law was not pertinent up to now, as negative rates were only directly applied to monetary policy counterparties based on contractual agreements on the open market or within the framework of facilities that the banks use on their own initiative.However, such an exemption is unlikely to be available when digital euros are issued to fulfil a public task.
Moreover, it does not matter whether only fewer goods can be acquired with a certain quantity of money due to rising prices, or whether fewer goods can be acquired because negative interest rates have reduced the quantity of money in question. 188Besides, almost 10 years after the introduction of negative interest rates, 189 the associated negative side effects are becoming increasingly tangible, gradually altering the role of central banks and ultimately impeding their independence. 190At the same time, scholars without ties to central banks have yet to provide robust evidence of the net positive effects of low interest rates.A negative interest-bearing digital euro might also violate the principle of proportionality.The envisaged objective of preventing monetary policy counterparties from circumventing the central bank's interest rate policy could be achieved by milder means-namely, by either prohibiting counterparties from holding digital euros (whether as legal or beneficial owners) or applying the reserve rate to their digital euro holdings.Since all counterparties are regulated institutions, this measure would be enforceable.Finally, the introduction of a digital euro carrying a negative interest rate may provoke public resentment, making its introduction politically inexpedient. 191

CONCLUSION
This article has reached two key conclusions.First, based on article 128(1) TFEU, the ECB and the NCBs of the Eurosystem are already de lege lata both authorized and obliged to issue a digital euro in the form of a digital equivalent and complement to tangible cash.Second, the treaties include no authorization to use such digital euro as a medium of monetary policy transmission itself.In particular, the digital euro must not be interest-bearing.
Regarding the first conclusion, empowerment and obligation to issue money is based on the ECB's and NCBs' key objective of ensuring the availability of ideal monetary objects-public and private.Ideal money is as risk-free (thus circulating at face value) and uniform (ie circulating at par with other monies of the same currency) as possible in terms of value as well as secure, efficient, privacy protecting, and inclusive in terms of access.Such money, particularly if it is to be credit risk-free, cannot be created by market participants.Rather, it must be issued by a public body that is independent of the treasury, ensures price stability (to minimize the risk of inflation), and enjoys budgetary autonomy.The availability of ideal monetary objects for the public thus proves to be a public service that must be provided in the public interest.Money issuance under article 128(1) TFEU is the instrument with which this objective is achieved.
This does not prevent private money, above all deposits, from being issued, but instead promotes coexistence.Owing to the ideality of the public money, private monies are also designed as ideally as possible because private issuers must maintain the quality of their private money at such a level that the public does not want to hold mostly public money.Until the digital era, tangible banknotes fulfilled this function as ideal money for the public and anchor for private monies.
However, with society's advancing digitalization and the growing AML hurdles, traditional banknotes are increasingly losing their convenience.Hence, the decline in the use of cash by no means suggests that the issuance of tangible cash pursuant to article 128 TFEU is becoming obsolete.Rather, it is an indication that the ECB and the NCBs no longer entirely fulfil the objective of ensuring the availability of ideal monetary objects by issuing tangible cash alone.A new, additional monetary object is needed: a digital euro.Only with a digital euro in combination with tangible cash will the economy of the euro area, which is in the midst of a transition from the analogue to the digital age, again have ideal monetary objects at its disposal.
If article 128(1) TFEU were to be interpreted narrowly (ie limited to tangible banknotes), the ECB would be unable to counteract the decline in demand for domestic public money, and its mandate to issue banknotes would be deprived of meaning.This cannot have been the intention and will of the treaty drafters.Consequently, article 128(1) TFEU must be interpreted in a broader sense as both empowering and obliging the ECB to authorize the issuance of a digital euro as just described.
The second conclusion is that the use of a digital euro as a monetary transmission medium is impermissible under the current constitutional framework.The issuance of cash to the public on the basis of article 128 TFEU is not part of the instrument of monetary policy as mentioned in article 127(2), first indent, TFEU.Nothing to the contrary can be derived from articles 17 and 22 of the Statute: like articles 18 and 20, article 17 of the Statute is aimed at regulating the circumstances under which Eurosystem members conduct their monetary policy operations with selected counterparties.Even if the circle of 'market participants' were to be extended, the term chosen by the treaty drafters is clearly aimed at business actors and was never intended to cover the Downloaded from https://academic.oup.com/jfr/article/7/2/284s/6375131 by Juridische Bibliotheek Der UU/University Library Utrecht user on 23 December 2021 public at large.Nor can it be argued that the Eurosystem's task of providing facilities under article 22 of the Statute may include the establishment of an infrastructure for the issuance, processing, and settlement of a digital euro.Unlike monetary policy and note-issue, this cannot be an end in itself.On the contrary, only insofar as it is necessary either for monetary policy or for the issuance of money may article 22 of the Statute be invoked. 192he only, yet still essential, roles that a digital euro plays in terms of monetary policy under the current constitutional framework are to safeguard the existing monetary transmission mechanisms and potentially to improve the supply of information to the Eurosystem.The existing transmission mechanisms require stable counterparties in a stable market, a single currency, and effective media for disseminating monetary policy impulses-above all, reserves and payment infrastructures.The issuance of a digital euro as an ideal form of public money creates indispensable preconditions for these requirements: with its anchor function, it ensures the singleness of the currency and has a disciplinary and thus stabilizing effect on the banks, which are the most essential counterparties in monetary policy operations.
With that said, cash-whether tangible or digital-must not be directly used for monetary policy.A digital euro may only serve as a complement to existing banknotes to ensure the availability of ideal monetary objects for the public.This, of course, presupposes that a digital euro would have properties that are at the technological frontier and in line with best practices and the current state of the art.However, the public sector is not known for innovation.It is therefore essential that the provision of all non-core services related to a digital euro be left to (supervised) private entities.They could, for example, authenticate end users and deal with AML-and CFTrelated activities, provide technical connectivity between users and the Eurosystem's infrastructure, execute digital euro transactions on behalf of their customers, and offer storage facilities for digital euro holdings. 193On the one hand, this could leverage existing customer-facing services and avoid the costly duplication of processes.On the other hand, competition among these entities would drive technical innovation, allowing the Eurosystem to implement prevailing solutions.
Given the strong network externalities associated with payment systems, the Eurosystem should assume an operative role by providing a core infrastructure on which private entities might establish these additional services.This would help to reconcile competing policy objectives: it would mitigate the market dominance of private payment systems and reduce the concentration risk, while creating a level playing field upon which the private sector could further innovate its own monies and services to the public.
. 21 Markus K Brunnermeier, Harold James and Jean-Pierre Landau, 'The Digitalization of Money' , NBER Working Paper No 26300 (September 2019) 32 <https://www.nber.org/system/files/working_papers/w26300/w26300.pdf>.In China, non-bank payment groups, such as AliPay (Alibaba) and WeChat Pay (Tencent), were already obliged in 2018 to transfer all customers' funds until then held with commercial banks to NetsUnion and China UnionPay.Both represent the reserve-based state clearing network and have since acted as custodians for customer funds, now covered by central bank reserves.See Huber (n 15) 24.

Table 1 .
Selected objectives, measures, and instruments 52 See section II.2.c.53 'Smooth' is used here in an overarching sense, as in ECB, 'The role of the Eurosystem in payment and clearing systems' Monthly Bulletin (April 2002) 47, 48 <https://www.ecb.europa.eu/pub/pdf/mobu/mb200204en.pdf> ie requiring a constant balancing between the conflicting characteristics of efficiency and security.54 Regarding speed and efficiency see eg Crawford, Menand and Ricks (n 4) 130.
55 Stressing the importance of social inclusiveness of cash, see Opinion of Advocate General Pitruzzella, delivered on 29 September 2020 in joined Cases C-422/19 and C-423/19 Johannes Dietrich and Norbert Häring v Hessischer Rundfunk ECLI:EU:C:2021:63, Opinion ECLI:EU:C:2020:756, paras 134-139.Crawford, Menand and Ricks (n 4) 125.56 See Eurosystem, 'Exploring anonymity in central bank digital currencies' , IN FOCUS No 4 (December 2019) <https://www.ecb.europa.eu/paym/intro/publications/pdf/ecb.mipinfocus191217.en.pdf>;ECB, 'Report on a digital euro' (n 1) 27 and below in section II.4.a.Downloaded from https://academic.oup.com/jfr/article/7/2/284s/6375131 by Juridische Bibliotheek Der UU/University Library Utrecht user on 23 December 2021 They regularly have different issuers, such as commercial banks for 66 In response to the financial crisis, the Union also created the European Banking Authority (EBA) in 2010 and in 2013 expanded the supervisory powers of the ECB based on article 127(6) TFEU to include direct supervision of the largest banks in the Union: Council Regulation (EU) 1093/2010 of the European Parliament and the Council of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/78/EC, [2009] OJ L 331/12 (re EBA); Council Regulation (EU) 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of the credit institutions, [2013] OJ L287/63 (re ECB supervision).67 At least in the past, states have repeatedly rushed to help systemically relevant banks that were failing.In England, the practice for quite some time until the 1990s was to not let any financial institution fail: Forrest Capie and Geoffrey Wood, 'The development of the Bank of England's objectives' in Peter Conti-Brown and Rosa María Lastra (eds), Research Handbook on Central Banking (Edward Elgar Publishing 2018) 34, 46.
Eg emergency liquidity assistance (ELA) provided by NCBs based on article 14.4 of the Statute in conjunction with the Agreement on emergency liquidity assistance of 17 May 2017.69 See Directive 2014/49/EU of the European Parliament and of the Council of 16 April 2014 on deposit guarantee schemes (recast), [2014] OJ L173/149.70 For a comprehensive overview, see Till Müller-Ibold, 'State Aid for Financial Institutions' in Amtenbrink and Herrmann (n 28) para 39.56ff.Besides, in response to the financial crisis, several instruments of aid were established by both the Union and the Member States: Vestert Borger, 'EU Financial Assistance' in Amtenbrink and Herrmann (n 28) para 32.1ff.and Ulrich Forsthoff and Jasper Aerts, 'Financial Assistance to euro Area Members (EFSF and ESM)' in Amtenbrink and Herrmann (n 28) para 33.1ff.They have since been supplemented with extraordinary monetary policy operations by the ECB, intended to safeguard the monetary policy transmission mechanism, starting in 2009 with the Covered Bond Purchase Programme (CBPP) and ending (to date) in 2020 with the Pandemic Emergency Purchase Programme (PEPP).The Downloaded from https://academic.oup.com/jfr/article/7/2/284s/6375131 by Juridische Bibliotheek Der UU/University Library Utrecht user on 23 December 2021 deposits, the Member States for coins, and the Eurosystem for tangible banknotes and reserves.
See eg Gersbach and Wattenhofer (n 77) 2ff.87 Article 128(2) TFEU.88 Article 128(1) TFEU and article 16 of the Statute.89 Article 127(4) 4th indent TFEU and article 17 of the Statute.See eg BIS CPMI, Central bank digital currencies (March 2018) 3ff <https://www.bis.org/cpmi/publ/d174.pdf>.90 See section II.2.b. Downloaded from https://academic.oup.com/jfr/article/7/2/284s/6375131 by Juridische Bibliotheek Der UU/University Library Utrecht user on 23 December 2021 Downloaded from https://academic.oup.com/jfr/article/7/2/284s/6375131 by Juridische Bibliotheek Der UU/University Library Utrecht user on 23 December 2021 187 Rogoff (n 181) 1: The idea of 'taxing currency' in this way is attributed to Silvio Gesell, Die Natuerliche Wirtschaftsordnung (Rudolf Zitzmann Verlag 1916), available in English as The Natural Economic Order (Peter Owen Ltd 1958); see also Willem H Buiter, 'Negative Nominal Interest Rates: Three Ways to Overcome the Zero Lower Bound' NBER Working Paper 15118 ( June 2009).188 The origin of the price stability mandate, that is debasement of coinage, should not be forgotten.It was initially addressed by transferring the issuance of money to independent bodies that did not reduce the fineness of the coin for fiscal purposes.With the transition to fiat money, a new instrument was needed instead of the standard of the coinage (Münzfuss in the sense of a fixed amount of precious metal in a coin: the price stability mandate).In addition, negative interest rates on a digital euro would have to be weighed against the right to property as enshrined in article 17(1) of the Charter (n 117).189 See Corinne Zellweger-Gutknecht, 'Negativzins: Vergütung für die Übernahme des Geldwertrisikos durch den Kapitalnehmer' (2015) Zeitschrift für die gesamte Privatrechtswissenschaft 350, 362ff.190 Among these are the risk that governments will further postpone necessary consolidation and reform efforts due to a loose fiscal policy framework; conflict of interest of central banks of deeply indebted states; eroding margins of banks and pension funds; lenders financing unsustainable or overly risky projects and borrowers; overvaluation of safe haven currencies leading to distortion in the export sector, including tourism, or prompting central banks to balloon their balance sheet.191 Nabilou (n 182) 12 with further references.Downloaded from https://academic.oup.com/jfr/article/7/2/284s/6375131 by Juridische Bibliotheek Der UU/University Library Utrecht user on 23 December 2021