Message from the CEO, Nina Schindler
New technologies are causing the EU and global payments landscape to evolve rapidly and drive competition among an ever-increasing number of actors and payment solutions on offer. A multitude of non-traditional providers have entered the market, new crypto-assets and stablecoins emerge with increasing frequency, and more and more payment service providers leverage innovations, such as distributed ledger technology and tokenisation to improve back-end processes and front-end user experiences.
In the context of this new reality, the European Central Bank is considering issuing a riskless, accessible and efficient form of digital central bank money. The ECB sees a retail digital euro as an important tool to preserve the role of public money in the light of the declining use of cash, dominance of European electronic payments market by non-EU actors and the emergence of disruptive innovations, such as stablecoins which threaten Europe’s strategic autonomy and monetary sovereignty.
As co-operative banks are deeply rooted in local communities, give high importance to geographical proximity to their customers thereby ensuring financial inclusion and offer a wide range of payment services and solutions including the access to cash, the EACB and its members are an important stakeholder in the policy debate on the topic. Nearly a year into the ECBs investigation phase of the digital euro and with the European Commission also just having closed a consultation on the topic, we approached Evelien Witlox, the Programme Manager of the European Central Bank, for a short interview on the state of play and asked Dr. Andreas Martin, member of the Euro Retail Payments Board on behalf of EACB, for his views.
3 Questions to Evelien Witlox, Programme Manager of the digital euro project, European Central Bank
Evelien Witlox is the program director in charge of the Digital Euro project of the ECB. She has extensive managerial experience in the payments industry, amongst others as Global Head of Payments within ING and General Director Products and Innovation within equensWorldline. She has been board member of both European Payment Council and European Automated Clearing House Association. She has driven the roll out and implementation of EMV, Instant Payments and PSD2 on an European level in her respective companies. She has a master degree from the Technical University of Eindhoven and from Tilburg University.
- Almost a year ago, on 14 July 2021, after analysis, experiments and input from citizens and professionals, the Governing Council of the European Central Bank (ECB) launched the investigation phase of the digital euro. Could you give us a brief reminder of the background, objective and timeline of the investigation phase and where you stand in your investigation right now?
The launch of the digital euro project marks the start of an investigation phase over two years, but it does not entail an exante commitment to issuing a digital euro thereafter.
The investigation considers today’s payments landscape and how it might evolve in the future. A digital euro would enable digital public money for retail use, preseve the important role of public money as the anchor of the payments and monetary system while ensuring smooth coexistence, convertibility and complementarity of the various forms of public and private money, as well as contribute to Europe’s strategic autonomy and economic efficiency.
The Eurosystem aims to answer open questions on how a digital euro should be designed to achieve its objectives, to inform how the digital euro could look like and to advice on a future implementation plan. This includes possible use cases that a digital euro should provide, product design options, user requirements, business models for supervised intermediaries like banks and payments service providers within the digital euro ecosystem, as well as conditions under which front-end services built on a digital euro could be provided. To this end we are actively interacting with the European retail payments market, including an active dialogue with the Market Advisory Group and the stakeholders within the Euro Retail Payments Board. These discussion have already started.
The Eurosystem is also conducting regular exchanges with the European co-legislators, particularly on regulation and legislative proposals. Furthermore, while abstaining from a technology decision, prototyping activities will commence soon and contribute to policy decisions.
Upon the conclusion of the investigation phase, the EBC’s Governing Council would decide on whether to start a realisation phase. This phase would include the implementation of user requirements, development and testing of the appropriate technical solutions and business arrangements necessary to provide a digital euro.
- For retail banks, like co-operative banks, deposits are an important source of funding. They are concerned that, if introduced, depositors could transform their commercial bank deposits into digital euro holdings. This could lead these institutions to face challenges in fulfilling their minimum liquidity requirements for both the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NFSR). Which safeguards does the ECB consider in that respect?
A digital euro would be issued by the ECB, i.e. a central bank that as part of its mandate, will pay close attention to financial stability and avoid the potential crowding-out of private intermediaries. In that context we have been analysing potential risks emerging from the introduction of a digital euro, as well as the tools to manage them in both normal times and times of financial stress.
Deposits represent an important source of funding for euro area banks today. The introduction of a digital euro could lead to the substitution of parts of these deposits. This is why the threat of excessive use as investment will be tackled pre-emptively, and mitigated by design.
One such tool entails limits on individual holdings. Another involves applying tiered remuneration, with larger holdings earning less attractive rates.
Final decisions on which of the tools to deploy and how to parametrise them will only be taken close to the possible introduction of a digital euro. This is because these choices need to consider the economic and financial environment prevailing at that point in time. At the same time, the design of tools to avoid excessive use will aim at simplicity, in terms of both technical implementation and user experience.
- On 5 April the European Commission launched a targeted consultation on the digital euro. This consultation addresses several topics that are also part of the ECBs reflections in the investigation phase. Could you say something about how the two workstreams connect and how the two institutions work together on this important topic?
The success of a digital euro will amongst others heavily depend on the cooperation between European authorities and institutions. Therefore, we are engaging closely with the European Commission, but also the European Parliament and the Eurogroup on major design issues and the aspects of a digital euro that are relevant for EU policy more broadly.
The ECB is cooperating closely with the European Commission to review at a technical level a broad range of policy, legal and technical questions emerging from a possible introduction of a digital euro, taking into account our respective mandates and independence provided for in the Treaties. In this light, we have established a joint contact group that meets regularly. The group has been very valuable for discussing important policy questions and early findings emerging from the Eurosystem’s technical analyses.
Our close cooperation with the Commission is also helpful for reaching a common understanding of the changes to the EU legislative framework which would be needed to introduce a digital euro. A Regulation of the co-legislator, upon a proposal by the Commission, would be required for a digital euro to be used as the single currency, concurrently with euro banknotes and coins. For the Regulation, an impact assessment will be prepared, which will be supported by consultations carried out by both the Commission and the ECB.
Second Opinion from Andreas Martin, Representative of the EACB in the Euro Retail Payments Board & Member of the Board of Managing Directors, BVR
Andreas Martin is Member of the Board of Managing Directors of the German Association of Co-operative Banks (BVR) since 2009. His portfolio comprises economics, business administration, bank organization/IT, payments processing, HR management, internal services and accounting. He is also member of the supervisory board of DZ Privatbank and VR Payments. Andreas Martin holds a Docter’s degree in Economics. He is the official representative of the EACB in the Euro Retail Payments Board.
The EACB appreciates the importance of assessing the need for introducing a digital euro into Europe’s economic and financial system. The risks that stablecoins or other private forms of digital money can bring to financial stability are significant. The international role of the euro, the need to preserve the role of public money, for monetary sovereignty and strategic autonomy are all more than valid reasons to do a thorough assessment of the role that a digital euro could and should play in this context. At the same time, the introduction of a digital euro, if and when decided upon, is a large-scale project that may have far-reaching implications for the European economy, financial sector and society at large. This demands a thorough reflection involving all relevant stakeholders. The EACB is therefore happy to see that the ECB, as part of its investigation phase, has stepped up its engagement with stakeholders. It warmly welcomes the structured dialogue that has been set up with the members of the Euro Retail Payments Board, both at group and individual level.
As part of this dialogue, the EACB is looking forward to discussing the topics that preoccupy the minds of its members, and in particular the question of how best to address the different policy concerns that the ECB has taken as the starting point for its reflection. Can they all be addressed with a retail digital euro? Or do we need a combination of different kinds of retail and wholesale complemented by private sector solutions?
When it comes to preserving the EU’s strategic autonomy for example, these private sector solutions can play an important role. With the right incentives, the private sector could develop EU home-grown payment solutions as an alternative to those of non-EU actors. Such solutions could be built, for example, on instant euro credit transfer or for some needs on tokenized private money. And we should also have a look at the possibility of a wholesale digital euro. A wholesale digital euro could help in maintaining or even strengthening the international role of the euro by providing the cash leg for the trading of increasingly tokenised securities. In addition it could be the basis for more efficient settlement in payment and the settlement mechanism of tokenized commercial bank money. Therefore, we warmly welcome the recent consultation for a whole sale CBDC.
Zooming in on the topic of the retail digital euro, which the investigation phase of the ECB is focusing on, the key question to address is how best to position it. Today, banks and other payment service providers offer a plethora of digital means of payments that cater for different types of demands of retail customers. Besides that, cash is still widely used across most EU countries and access to it is ensured by banks and other providers through bank branches, ATM networks and merchants. So, a lot of thought needs to go into the question what use case should a digital euro fulfill. The EACB preference would be to limit the retail digital euro to use cases like POS, P2P and e-Commerce as a complement to cash. We would consider that the development of the other use cases, as a complement to commercial bank money, should remain in the hands of the market. Another question revolves around how to make sure that public money in digital form don’t distort market competition by directly competing with the existing payment solutions provided by banks and other payment service providers? This would imply that a digital euro should have a basic design, while the development of value-added features should be left to market competition.
Furthermore, in case a digital euro is launched, who would finance its costs, such as infrastructure, logistics, support, AML/CFT measures? And related to that, which business model is being considered for a digital euro? The business model should be market driven, transparent and competitive.
Finally, we need to look at how to avoid the negative impact of a digital euro on banks’ liquidity and lending. The European economy is mainly financed by banks, unlike e.g. USA, where companies rely more on capital markets for funding. The introduction of a digital euro could result in significant outflow of bank deposits to digital euro accounts, and consequently severely impact bank lending and financial stability. In order to prevent these risks from occurring, the amount of a digital euro in circulation should be strictly limited, i.e. individual holdings of digital euro should be subject to low level caps set by law, this to avoid that caps can be easily relaxed under public pressure e.g. in times of financial distress.
In a recent speech the ECB Board Member Fabio Panetta stated that “To succeed, a digital euro will need to add value for users, foster innovation, and enjoy strong political and societal support”. The EACB wholeheartedly subscribes to that and would like to add that it also needs to be supported by banks – as intermediaries – who play a central role in today’s economy liquidity supply, customer support and payment systems.