Opinion of the European Central Bank of 6 September 2022 on the replacement of banknotes and coins and on cash handlers (CON/2022/31)

OPINION OF THE EUROPEAN CENTRAL BANK of 6 September 2022 on the replacement of banknotes and coins and on cash handlers (CON/2022/31) Introduction and legal basis

On 12 July 2022 the European Central Bank (ECB) received a request from Latvijas Banka for an opinion on a draft regulation on the submission, acceptance, identification and replacement of banknotes and coins at Latvijas Banka and on a draft regulation on the processing and recirculating of euro banknotes and coins (hereinafter collectively, the ‘draft regulations’). The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the Functioning of the European Union and the first, third and fourth indents of Article 2(1) of Council Decision 98/415/EC , as the draft regulations relate to currency matters, Latvijas Banka and the collection, compilation and distribution of monetary, financial, banking, payment systems and balance of payments statistics. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

1. Purpose of the draft regulations

Both draft regulations pertain to the implementation of the new Law on Latvijas Banka, which will enter into force on 1 January 2023 . The objective of both draft regulations is to regulate procedural aspects related to material law provisions contained in ECB and Union legal acts with regard to the retrieval, replacement and recirculation of euro banknotes and coins. The draft regulation on the submission, acceptance, identification and replacement of banknotes and coins at Latvijas Banka regulates the replacement of damaged euro banknotes and coins, the replacement of euro banknotes fit for circulation, and the handling of euro banknotes and coins with signs of counterfeiting. This draft regulation does not govern all cash services provided by Latvijas Banka, i.e., it does not cover services provided by Latvijas Banka that are governed by private law (e.g. the sale of numismatic coins and replacement of non-cash means of payment with uncirculated euro commemorative coins where the transaction is carried out according to the distance contract concluded between Latvijas Banka and the person concerned on Latvijas Banka's website). According to the explanatory memorandum accompanying it, the draft regulation on the processing and recirculating of euro banknotes and coins replicates and elaborates on the requirements to be fulfilled by

cash handlers that are provided for in Latvijas Banka regulation currently in force and in Union legislation binding on cash handlers. The ECB notes that this draft regulation also contains a number of new legal provisions aimed at clarifying the existing legal framework. Firstly, the legal framework on the provision of statistics and protection of statistical data and information referred to in Section XI of the Law on Latvijas Banka is to be applicable to data submitted by cash handlers in relation to the euro banknote and coin handling machines used as well as the volume of euro banknotes and coins processed by those machines, and Latvijas Banka must store such statistics permanently. Secondly, this draft regulation specifies the cases in which the Commission for the Management of Banknotes and Coins of Latvijas Banka (hereinafter the ‘Commission’) may refuse to register a cash handler. Thirdly, this draft regulation specifies the information that the cash handler must provide to the Commission before using the euro banknote or coin handling machine, and provides for the Commission’s right to request from the cash handler information relating to cooperation with other cash handlers or delivery of euro banknotes and coins from the national central bank of the Member State which has adopted the euro. Fourthly, this draft regulation requires the cash handler to draw up and maintain written internal procedures and to establish the maintenance plan of the euro banknote and coin handling machine. Fifthly, this draft regulation requires statistical data on the euro banknote handling machines used in the previous half year and the volume of euro banknotes processed by these machines to be encrypted and signed digitally by the cash handler in a manner agreed upon with the Commission. Finally, this draft regulation provides that the plan for on-site inspections on the premises of the cash handler or at its designated locations where euro banknotes and coins are processed must be prepared yearly and published on Latvijas Banka's website.

2. General observations

The ECB welcomes both draft regulations as they are in line with the relevant Union and ECB legal frameworks and contain useful procedural norms needed for the smooth application of these frameworks.

3. Specific observations regarding replacement of damaged banknotes and coins

3.1. The draft regulation on the submission, acceptance, identification and replacement of banknotes and coins at Latvijas Banka establishes that, where part of a damaged banknote that constitutes 50 % or less than 50 % of the original size of the banknote is submitted, the applicant must submit evidence, if available, that the missing part of the banknote has been destroyed . This draft regulation further determines that the Commission, based on the opinion by the competent authority, must decide on the replacement or non-replacement of damaged banknotes in cases where the submitted part of the damaged euro banknote is 50 % or less of the original banknote size, without referring to the need to prove the destruction of the missing parts. This could be interpreted to mean that the Commission may decide to replace a banknote that is unfit for circulation where 50 % or less of the banknote is presented without the applicant having proven that the missing part or parts has or have been destroyed. In order to avoid any legal certainty concerns as regards the application of Article 3(1) of Decision ECB/2013/10 of

the European Central Bank , this draft regulation should be amended to clarify that 50 % or less of a banknote that is unfit for circulation may only be replaced if the applicant proves that any missing part has been destroyed. 3.2. The draft regulation on the submission, acceptance, identification and replacement of banknotes and coins at Latvijas Banka provides that the Commission decides on the replacement or non-replacement of damaged banknotes, amongst others, in cases where the euro banknotes have been deliberately damaged . In order to avoid any concerns about legal certainty as regards the application of Article 3(3) of Decision ECB/2013/10, this draft regulation should be redrafted with a view to clarifying that intentionally damaged banknotes may not be replaced unless Latvijas Banka knows or has sufficient reason to believe that an applicant is (or can prove that he is) acting in good faith.

This opinion will be published on EUR-Lex.

Done at Frankfurt am Main, 6 September 2022.

[signed]

The President of the ECB

Christine LAGARDE