Opinion of the European Central Bank of 7 March 2023 on the limitation of cash payments for public social insurance contributions (CON/2023/7)

OPINION OF THE EUROPEAN CENTRAL BANK of 7 March 2023 on the limitation of cash payments for public social insurance contributions (CON/2023/7) Introduction and legal basis

On 24 March 2022 the National Council of the Slovak Republic adopted Law No 125/2022 Coll. which amends and supplements Law No 461/2003 Coll. on social insurance (hereinafter the ‘Law’). The European Central Bank (ECB) has not been consulted by the Slovak authorities on the law. The ECB has decided to deliver an own initiative opinion on the Law. 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 second indent of Article 2(1) of Council Decision 98/415/EC , as the Law relates to means of payment. 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 Law

1.1 The Law, among others, amends Law No 461/2003 Coll. on social insurance by abolishing the option to pay social security contributions to the Sociálna poisťovňa (Social Insurance Agency) in cash, and by allowing such payments to be made only by means of other (priced) services, i.e. by bank transfer or postal money order . The explanatory memorandum accompanying the Law when it was submitted to the National Council of the Slovak Republic explains this change as follows. Cashless payments is one of the tools to combat the shadow economy, i.e., the illegal movement of money that has not been registered in the State’s records. According to the explanatory memorandum, payments with banknotes within the legal payment system form part of the shadow economy and a proportion of the shadow economy can be cut by using cashless payment systems. The explanatory memorandum further explains that the disadvantages of cash payments include the risk of theft, the possibility of counting errors, the possible use of counterfeit

money, the additional costs for providing security, such as safes or armed protection, the possibility of spreading diseases and the need for personal contact. 1.2 The ECB understands that the scope of the Law’s restriction on cash payments not only covers the payment of social insurance contributions, but also other payments to the Social Insurance Agency, such as penalties and sanctions. The ECB also understands that this change is already reflected in the Social Insurance Agency’s recent practice, as it no longer accepts any cash payments at its branches.

2. General observations

2.1 Cash plays an important role in society. Cash is generally useful as a payment instrument because it is legal tender, widely accepted, fast and facilitates control over the payer’s spending. Moreover, it is the only payment instrument that allows citizens to settle a transaction in central bank money, which is also settled instantly, while ensuring privacy . In addition, the ability to pay in cash remains particularly important for certain groups in society that, for various legitimate reasons, prefer to use cash rather than other payment instruments, or do not have access to the banking system and electronic means of payments. These groups include not only elderly people, but also some disabled citizens, immigrants, socially vulnerable citizens, minors and others with limited or no access to digital payment services . Against this backdrop, the ECB closely monitors any national law developments that aim to limit cash payment possibilities for natural or legal persons and thereby interfere with citizens' right to pay in cash. 2.2 Under the Treaty, the European System of Central Banks has the basic task of promoting the smooth operation of payment systems , and the ECB has the exclusive right to authorise the issue of euro banknotes within the Union . The euro banknotes issued by the ECB and the national central banks of the euro area are the only banknotes with legal tender status within the euro area . 2.3 The concept of ‘legal tender’ of a means of payment denominated in a currency unit has been considered by the Court of Justice of the European Union. In particular, the Court has clarified that the concept of ‘legal tender’ signifies that this specific means of payment cannot generally be refused in settlement of a debt, denominated in the same currency unit at its full face value, with the effect of discharging the debt. In clarifying the concept of ‘legal tender’ under Union law, the Court has taken into consideration Commission Recommendation 2010/191 of 22 March 2010 on the scope and effects of legal tender of euro banknotes and coins , which provides useful guidance for the interpretation of the relevant provisions of Union law. Point 1 of Recommendation

2010/191 states that, where a payment obligation exists, the legal tender of euro banknotes and coins should imply: (i) mandatory acceptance of those banknotes and coins; (ii) their acceptance at full face value; and (iii) their power to discharge from payment obligations. According to the Court, this shows that the concept of ‘legal tender’ encompasses, inter alia, an obligation in principle to accept banknotes and coins denominated in euro for payment purposes . 2.4 Insofar as it allows the Union legislature to lay down the measures necessary for the use of the euro as the single currency, the Court clarified that Article 133 of the Treaty empowers the Union legislature alone to specify the legal rules governing the status of legal tender accorded to banknotes and coins denominated in euro, insofar as that is necessary for the use of the euro as the single currency. Such exclusive competence precludes any competence on the part of the Member States in the matter, unless they have been empowered by the Union to do so or for the implementation of Union acts . 2.5 However, the Court further clarified that the status of legal tender calls only for acceptance in principle of banknotes and coins denominated in euro as a means of payment, not for absolute acceptance. The Union’s exclusive competence in matters of monetary policy is without prejudice to the competence of the Member States whose currency is the euro to regulate the procedures for settling pecuniary obligations, which do not affect the principle that, as a general rule, it must be possible to discharge a payment obligation in cash. Thus, that exclusive competence does not prevent a Member State from adopting a measure falling within one of the Member State’s competences; for instance, a Member State may, based on its competence to regulate administrative procedures, oblige the public administration to accept cash payments from citizens. Neither does it prevent a Member State, in the exercise of its own powers, from introducing, on legitimate public interest grounds, a derogation from that obligation for statutorily imposed payments, subject to compliance with certain conditions. In particular, the obligation to accept euro banknotes and coins may, in principle, be restricted by the Member States for reasons of public interest and subject to the principle of proportionality. This means that any such restrictions must be proportionate to the public interest objective pursued. When limiting the possibility, recognised by Union law, of generally discharging a payment obligation in banknotes and coins denominated in euro, Member States must ensure that any measures comply with the principle of proportionality, which requires in particular that they are appropriate for achieving the legitimate objectives pursued by the legislation at issue and do not go beyond what is necessary in order to achieve those objectives . 2.6 The Court has established that restrictions of the legal tender status of euro banknotes in particular require that the legislation: (i) does not have the object or effect of establishing legal rules governing the status of legal tender of euro banknotes; (ii) does not lead, in law or in fact,

to abolition of those banknotes, in particular by calling into question the possibility, as a general rule, of discharging a payment obligation in cash; (iii) has been adopted for reasons of public interest; (iv) only entails a limitation on payments in cash that is appropriate for attaining the public interest objective pursued; and (v) only entails a limitation on payments in cash that does not go beyond what is necessary in order to achieve the public interest objective . 2.7 Regarding the proportionality of a restriction of the legal tender status of euro banknotes, the Court requires not only that the measure is appropriate for attaining the public interest objective pursued, but also that it must not go beyond what is necessary in order to achieve that objective. The ECB has undertaken additional reflection in its opinions with respect to whether limitations may be considered proportionate . In particular, the ECB has noted that the broader and more general a limitation is, the stricter should be the interpretation of the requirement for the limitation to be proportionate to the objective pursued. When considering whether a limitation is proportionate, the adverse impact of the limitation in question and whether alternative measures could be adopted that would fulfil the relevant objective with a less adverse impact should always be considered .

3. Specific observations

3.1 The Law’s abolition of cash payments for the specific purpose of making social contributions at the Social Insurance Agency has neither the objective nor the effect of amending the legal rules governing the status of legal tender of euro banknotes or coins. The Law does not lead, in law or in fact, to the abolition of banknotes in the Slovak Republic . 3.2 The ECB understands that the Law was adopted for reasons of public interest. The explanatory memorandum provides several reasons for limiting payments of social insurance contributions in cash. The ECB considers these various reasons to fundamentally fall into three different kinds of public interest objectives: (i) combating the shadow economy; (ii) avoiding unreasonable costs for public institutions that have to accept cash payments due to the risk of theft, counting errors, the use of counterfeit money and additional costs for providing security; and (iii) mitigating the risk of spreading dangerous and contagious diseases. 3.3 The ECB is of the view that the Slovak authorities have not demonstrated that the abolition of the option to pay social contributions to the Social Insurance Agency in cash is appropriate for attaining the pursued public interest objectives, and that this limitation of cash does not go beyond what is necessary to achieve these objectives. 3.4 First, it can be questioned whether a limitation of cash payments to the Social Insurance Agency is appropriate and necessary to combat the shadow economy. In particular, it is not clear how

removing the possibility to make a cash payment to a public law institution, such as the Social Insurance Agency, which records such cash payment in its accounts and can share such information with other public (e.g., tax) authorities , can contribute to combating the shadow economy. 3.5 Second, while the Court has accepted that it is in the public interest that monetary debts to public authorities may be honoured in a way that does not involve those authorities in unreasonable expense which would prevent them from providing services cost-effectively , the ECB is of the view that the Slovak authorities have not sufficiently demonstrated that the Social Insurance Agency incurred unreasonable expenses in accepting cash payments that would prevent it from providing cost-effective social services. 3.6 Third, the Slovak authorities have not demonstrated with data that, during a pandemic or in a situation with epidemic potential, the abolition of the option to pay social contributions to the Social Insurance Agency in cash is appropriate and necessary to mitigate the risk of spreading a dangerous and contagious disease, where there are no or only insufficient measures mitigating the spread. In fact, the Eurosystem conducts regular research into the potential impact on public health of the production and circulation of euro banknotes, including in relation to COVID-19. Within the context of the COVID-19 pandemic, it has been shown that the risk of virus transmission via banknotes and coins is very low and that cash is safe to use . 3.7 Finally, the Law and its explanatory memorandum do not address the proportionality of the cash payments prohibition in light of existing alternative means of payment for the relevant social insurance contributions, namely bank transfers and postal orders, which are subject to additional fees for payers . 3.8 To conclude, the ECB considers that the Slovak authorities have not sufficiently assessed the proportionality of the new limitation on cash payments. As the explanatory memorandum phrases the public interest objectives only in a vague manner and as the legislator has not provided any concrete impact assessment, it is difficult for the ECB to assess whether or not the limitation of cash payments to the Social Insurance Agency could be considered proportionate in light of the public interest objectives pursued. The Slovak authorities should thus carefully consider any restrictions on cash payments, taking into account the criteria established by the Court. In particular the Slovak authorities should ensure that restrictions on cash payments are appropriate and necessary to achieve the public interests pursued and do not call into question the possibility, as a general rule, of discharging a payment obligation in legal tender.

This opinion will be published on EUR-Lex. Done at Frankfurt am Main,7 March 2023. [Signed]

The President of the ECB

Christine LAGARDE