EU Council backs digital euro with both online and offline functionality

MILAN, Dec 19 (Reuters) - The EU Council on Friday backed a negotiating position for a digital euro that includes both online and offline functionality, diverging from earlier European Parliament proposals that focused solely on offline usage.

Under the Council's new position, the digital euro would be publicly issued by the European Central Bank and usable anytime, anywhere, whether users are connected to the internet or offline.

Fernando Navarrete, the European Parliament rapporteur for the digital euro, had advocated for an offline-only model to preserve users' privacy and the resilience of the unit itself, with the central bank to operate as the currency's regulator.

Online transactions would involve immediate processing through the central bank's ledger or through authorised intermediaries, while offline transactions can be recorded locally and later synchronised with the central ledger when connectivity resumes, meaning the system can be used even in areas with poor connectivity while preserving cash-like privacy for its users.

The ECB is working to introduce a digital euro to modernise its payment system and ensure central bank money remains relevant in an increasingly digital world. With cash use declining, a central bank-issued digital currency would help maintain monetary sovereignty and trust in the currency. 

The project, however, is advancing slowly and faces resistance from portions of the banking sector. 

Council ministers endorsed offline usability for everyday flexibility and resilience in case of power outages. But they also included online access to support a broader set of digital payments.

The Council's mandate sets out key design features, including limits on digital euro holdings to prevent it from endangering financial stability by draining away deposits from banks. 

These ceilings will be determined by the ECB, subject to an overall cap reviewed every two years.

Providers must offer certain basic digital euro services free of charge, though fees will apply for value-added features. 

A transition period of at least five years will cap interchange and merchant fees at levels in line with existing payment methods, with fees adjusted afterward based on actual costs. 

The Council's agreement clears the way for negotiations with the European Parliament on the legal framework for the digital euro. The Council, formally called the Council of the European Union, represents EU member states' governments, and it works alongside the European Parliament to adopt laws. 

Once that is adopted the ECB can proceed to issue the digital euro, which it has said could be operational by 2029 after a pilot phase in 2027.

(Reporting by Valentina Za; Editing by Hugh Lawson)