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“Supervisors must keep an eye on Libra”

“Supervisors must keep an eye on Libra” Interview with the Börsen-Zeitung

12.07.2019 | Burkhard Balz DE

Interview conducted by Detlef Fechtner and Mark Schrörs.

There’s much talk at the moment about Facebook’s new currency, Libra. What thoughts and concerns do you have regarding these developments?

The Bundesbank is open to innovation. However, we have more questions than answers when it comes to Libra at this moment in time. How exactly will it be designed? How secure is the technology behind it? How can such a global system be assessed and monitored? 

Has the question of supervision already been given some thought?

Facebook and its partners want to set up Libra as a Swiss foundation. In line with the residence principle, Switzerland would therefore be formally responsible. But Libra is designed to be a global project. This means that the institutions responsible for supervising or monitoring market infrastructures must reach a global consensus on how to treat Libra. Right now, the Bundesbank is helping to prepare a paper outlining the current state of play for the G7 summit. But quite apart from the topic of “supervision”, there are still other unanswered questions.

What do you have in mind?

There are unanswered questions relating to combatting money laundering. After all, it is problematic if it isn’t clear – or at least not clearly identifiable – who is behind which transactions or who the recipients of certain transactions are – also with regard to combatting terrorist financing.

Who do you expect will use Libra?

My personal opinion is that Libra will probably only be of interest to private users to start with. That is presumably also Facebook’s goal. And this will predominantly be in regions of the world that don’t yet have fully established payment markets.

What does this mean in terms of financial stability?

If I go by the premise that Libra is aimed at private users, then I believe that financial stability isn’t in any danger for the moment. However, if other groups also start making transactions using Libra then we’d need to keep a very close eye on this. This will certainly come in a second wave. Furthermore, supervisors must monitor Libra’s potential implications for traditional payment service providers.

Why?

Libra is in a strong “attacking” position and could weaken or oust other competitors. We are interested in what it would mean for conventional payment systems and for banks if, in future, an increasing number of payments are settled outside the channels considered usual today. After all, banks and payment service providers have so far been generating fairly decent returns from payments.

Are there questions that particularly arise from a central banking point of view?

Facebook has announced that Libra will be pegged to a basket of currencies. As a central banker, my question is: what about exchange rate risk?

You once suggested that Libra could have far-reaching implications for monetary policy. What do you mean by that?

As a central bank, we intentionally don’t refer to stable coins as currencies, particularly since the criteria for a currency aren’t fulfilled. But if people perceive such coins as a type of substitute currency, the implications have to be evaluated – not just for a regional currency area but also for monetary policy around the world. It then depends on which function such a system can assume and how we deal with this.

Could Libra cast doubt on the sovereign monopoly on issuing money?

I do not wish to speculate on this matter. However, I assume that the sovereign monopoly is, and will remain, exceptionally stable.

The debate in the Bundestag on digital central bank money is intensifying.

The Bundesbank is of course taking note of this.

And do you support the proposal?

I don’t think it’s very productive to make suggestions which aren’t legally necessary. It simply wouldn’t be possible to issue digital central bank money for everyone in the euro area at present. The Governing Council of the European Central Bank is the only body that could allow this.

Other countries outside the euro area are certainly contemplating digital currencies; for example, Sweden is considering launching an e-krona.

Yes, our counterparts in Sweden are contemplating this. And they are doing it in an extremely responsible way. As it happens, the Bundesbank has acted, too. But we don’t see ourselves as players in this field, but rather as someone watching developments from the sidelines and engaging in dialogue with relevant actors.

But you don’t rule out the Bundesbank taking on a more active role?

The Bundesbank would be wise to monitor the current situation closely. I don’t rule out the Bundesbank driving further innovation in future. But for now we are somewhat circumspect – especially since digital currencies are currently experiencing a certain hype. I believe that central banks, in particular, should be cautious and shouldn’t get caught up in this kind of hype.

You have flagged many risks that are bound up with a project like Libra. What about the opportunities it offers? And what does this mean for the payments market in Europe?

Systems of this kind pledge to make it even easier to send and receive money. When someone owes someone else money, the transaction is no longer carried out using cash or a bank card, but rather completely digitally and without any bank involvement.

For what transactions could this be particularly attractive?

For global transfers. Particularly for people who don’t work in their home country and send money back home. The fees for these transactions are considerable: they often come to around 7% of the transaction amount. In future, such transfers could become simpler, faster and no doubt also less cost-intensive.

Why have European competitors only been making slow progress up until now in making payments significantly simpler and faster?

That relates to the fragmentation of the markets in Europe. For example, the German market has a very good, competitive and technically well-positioned product: the girocard. And the issuers supporting the girocard earn good money from it. However, the girocard ends at our national borders. And that is the fundamental problem with all other European systems as well. We see strong fragmentation in payment solutions across Europe. So much so that national systems in some countries were sold in recent years because the national markets were classed as too small and too limited.

What is your assessment of current developments?

The pressure from providers outside Europe has massively increased of late. We have very strong American and also Chinese providers. For example, in Frankfurt you can see where Chinese tourists go, as Chinese payment services are accepted along this specific route. Payment services are brought into global competition through the tourist flows.

What does this mean for the provision of payment services in Europe?

Here in Europe, we need to strategically prevent a situation from arising in which American and Chinese providers are all we have left to choose between. Quite the contrary: European consumers should have options. At the end of the day, if customers are happy with providers from outside Europe and opt to use them, then that’s fine. But we must not allow a situation where Europe, with its single market and institutionalised union, cannot provide a European solution to consumers.

What kind of solution did you have in mind?

I am, of course, thinking of a private sector system. I do not see it as a task of the central banks to create complete payment solutions. I see the central banks solely as catalysts.

In what respect?

We can bring private sector providers to the table and talk with them, but in the end, they have to make the decisions by themselves. In my view, it is very important that all players involved think European.

Do you recognise the will of the providers to work on European solutions?

The pressure has become so great recently that all providers are ready to pursue dialogue, and not just in Germany. I very much welcome the fact that the German Banking Industry Committee has become pro-active in this regard. I hope that an agreement will be reached. But I also want to add that, to me, this is just an interim step. The end result must be a European solution, a European system.

What could such a European system be built on?

With instant payments, we have now already created quite a good basis on which to develop a European payment system. And there are, of course, successful systems in individual countries – I mentioned the girocard. These must be made compatible. And in the end, it is of particular importance that a European brand is created. Otherwise, Europe will not appeal to the general public when it comes to payment transactions.

What role do you envisage for politicians?

In terms of the development of a pan-European solution, politicians can and should play a role. Everyone must work hand in hand – the central banks, too, must play their part. I’m therefore very pleased that the Vice-President of the European Commission, Valdis Dombrovskis, has placed this objective at the top of the Commission’s list of priorities and launched the first initiatives.

How could politicians support a European solution?

If you want to create a truly European payment system, you will relatively quickly come up against the boundaries of EU competition law. This is where European legislators have to come in. The EU must create the appropriate conditions in competition law to make pan-European payment solutions possible.

What do you think of the claim that we need a European SWIFT, in other words a European-led network for the secure transmission of transactions?

I have a clear opinion on that. I consider the whole discussion to be of little help. Because even if we were to establish something like that, it would change nothing in terms of the dominance of the US financial system, which of course is also directly linked to the currency, i.e. the dollar.

So you don’t see any added value in a European counterpart to SWIFT?

Europe’s banks conduct dollar-based transactions on an extensive scale. Of what additional benefit would a new system be? I’m convinced that the European shareholders of SWIFT carry a certain weight within the organisation, and that’s another reason why I would be very cautious about pushing ahead with such initiatives from the European side.

You mentioned the dominance of the dollar. In your view, is the discussion on how the euro can be strengthened appropriate?

Yes, definitely. After all, currencies are defined by how strongly they are viewed by others. The euro is currently very clearly in second place behind the dollar as a global reserve currency. Just over 20% of the international monetary reserves are held in euro. It would be a legitimate political objective if the EU would now like to try to enlarge this share.

That probably wouldn’t please the United States?

 Correct. But the EU has to look ahead and define concrete objectives. When the European Commission President Jean-Claude Juncker announced his intentions, I was personally very pleased.

Why?

Because I had the impression that the European side has been acting very defensively in recent years. And if we are now reappraising this stance, then I consider that to be a good decision.

Up to now, the central banks have also been quite defensive in terms of the international role of the euro – but the tone has changed recently.

Up to now, strengthening the international role of the euro has not been a priority of the central banks. Our statutory mandate is clear: maintaining price stability. Despite this, I would find it gratifying if the ECB were to reassess its position. After all, the two aspects do not have to be at odds with one another.

What do you mean by that?

If the European Commission, the European Parliament and the national heads of government say they want to take a more pro-active stance in this regard, that does not intrinsically mean that the central banks have to follow suit. But serious thought must be given to this issue. Ultimately, I believe it is right for the Eurosystem to ask itself: what can we actually do to further improve this strong position that the euro already has today?

Let’s talk about fintech companies. How is the interplay between fintech companies and banks developing?

Looking at the market, fintech firms are currently operating mainly via cooperative ventures – and approaching customers themselves only to a small extent.

And how do you expect this relationship to continue developing?

I expect that cooperative ventures will also dominate in future. As you can see, by now almost all German banks and savings banks are considering whether to collaborate with fintech companies. That’s why I believe that the market is still very dynamic. I predict that the share of fintech companies that exit the market will increase. In certain instances, fintech companies will undoubtedly also be absorbed. Then the key question will be whether the major bigtech players, which have extraordinarily high liquidity and capital resources, will become increasingly dominant and buy up competitors.

If we view this from the perspective of banks, what does it mean and how big a threat is it?

I can only advise all players to be open and not perceive fintech companies as a threat but rather as competitors with innovative ideas. They should think about what this means for their business model. And I think there are just as many opportunities for established banks, too.

The Bank of England recently curtailed banking privileges by planning to allow fintech companies to deposit excess liquidity overnight.

This is a very interesting development. But I am somewhat cautious. I believe that opening up central bank systems to non-banks is no trivial matter. Because new payment service providers are not as well regulated and supervised as traditional banks, this can have potential consequences on fulfilling requirements within such a system. Hence great caution should be exercised here. This is not currently an option for the Eurosystem.

One more question on Brexit: the Frankfurt financial centre has become increasingly important in recent months, such as in the area of euro clearing. Does the Bundesbank see this as positive?

As you know, the Bundesbank does not pursue industrial policy. But naturally we see it as positive if there are developments that safeguard and strengthen our financial hubs here.

In terms of Brexit, what does the Bundesbank deem important?

For us, it is first of all important that the banks themselves are well prepared, particularly since a no-deal scenario is still on the table. My impression is that the financial sector in Germany has done as much of its homework as it can in terms of Brexit preparations. What concerns us more is that many banks’ customers seem inclined to wait until the last minute to make their decisions regarding Brexit.

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