The digital euro: what’s in it for the public Interview with the FAZ
The interview was conducted by Christian Siedenbiedel.
Translation: Deutsche Bundesbank
Mr Balz, yesterday the Governing Council of the ECB decided to start the preparation phase of the digital euro. What does that mean?
The two-year investigation phase on the digital euro conducted by the European Central Bank and the national central banks in the euro area has been successfully completed. A new stage is now beginning. From now on, the focus will be on what the digital euro should look like – and what sort of rulebook we need.
Is this decision a watershed moment – has the decision to adopt the digital euro reached the point of no return?
No, in my view, it is a further step in a major endeavour. The Governing Council has not yet taken a decision on whether to introduce a digital euro. That will only be possible once legislators in Brussels, which is to say the Council of the European Union and the European Parliament, have set up a legal framework for it.
What changes does this decision now entail for the practical work on the planned new digital currency?
It gives the work fresh impetus. Many important details have yet to be worked out, especially with regard to technical issues and the legal framework. Furthermore, we need to clarify how we wish to inform people about the project. This is a very important part of the venture. When euro cash was introduced more than 20 years ago, there was also a large-scale communication initiative on the part of the ECB and the national central banks. In addition, we need studies that examine potential risks more closely. They need to explore, for example, the question of how, specifically, we can ensure that the exchange of money held in bank accounts for digital euros does not impair financial stability. Holding limits – that is, upper limits on the amount of digital euro that can be held – is something that is being discussed. ECB Executive Board member Fabio Panetta has suggested an upper limit of €3,000 as an example. However, no decision has yet been made on the matter.
What specifically can the public expect of the digital euro? Give us a few details.
As things currently stand, there will be a digital wallet. This is an app on people’s smartphones which can be used to store their digital euros. You will be able to use your wallet to make payments online, or even offline for low-value transactions. This could happen, for example, via NFC technology, as used for contactless card payments. It would also be possible directly from smartphone to smartphone. For people who don’t have a smartphone, there is likely to be an alternative, such as a smart card.
When will we be able to start paying with the new currency? It won’t be by January 2026, as originally suggested by ECB President Christine Lagarde, will it?
No. Action first of all needs to be taken by legislators in Brussels. The European Parliament and the European Council need to decide on the introduction of the digital euro. In some cases, decisions by national parliaments are also likely to be necessary. Realistically, from today’s perspective it will be another few years before we can pay with the digital euro.
Why is this taking so long?
We have to wait for the political decisions to be made. This is not something the Governing Council of the ECB can decide on its own. European Parliament elections are scheduled for next year. Looking at the complexity of this issue and the legislative procedure, one might have doubts, at least, as to whether the political process will be completed before the June 2024 election. If not completed, the legislative procedure will start again from scratch with the new Parliament. Another reason for the long timeline is that the digital version of the euro will require an extensive testing phase with all stakeholders, especially with banks, savings banks and payment service providers.
If a private credit card provider launches a new credit card, it probably manages to do so in six months. . .
That may be the case. However, we are talking here about an additional version of our official currency. There are no off-the-shelf templates for the digital euro. It would be a completely new form of money. The euro enjoys a high level of public confidence and we want to achieve this for the digital euro as well. In this case, being careful is decidedly more important than being swift.
Is a gradual introduction of the new currency conceivable? How might that be structured?
This issue has also been discussed. There is a consensus in the Eurosystem that a gradual approach makes sense for a project of this magnitude. This ensures greater flexibility and minimises risks.
Will all retailers, petrol stations and restaurants then be forced to accept the digital euro alongside cash, debit cards and credit cards, and to pay for and have the necessary terminals for this?
We will discuss this with all the groups concerned. For us, it is important that the digital euro becomes legal tender. This is also stated in the legislative proposal to create the legal framework for a digital euro, which the European Commission presented at the end of June. We therefore also expect the digital euro to be widely accepted by retailers.
Why do ordinary members of the public even need the digital euro? Some people say that they already have cards and cash, and that’s more than enough for them.
In Germany we have a cash utilisation rate of 58% of all transactions, which is high by international standards. But the trend is declining. In this digital world, we also want to offer people access to central bank money, which is default-proof. We in the euro area are not alone here: 93% of central banks worldwide have embarked on such projects. Another argument for us central banks is that the competition never sleeps. The advantages of digital payments should not benefit only the providers of crypto tokens and bigtech firms.
That is the perspective of central banks. But what do ordinary people need the digital euro for?
People should have a choice. Of course they can continue to pay with their bank card or credit card. That is not something we want to call into question. However, a digital euro could be the first European means of payment they can use to pay in nearly all everyday situations throughout the entire euro area. Even without an internet connection, people could pay with the digital euro using the planned offline functionality. All this could be done while maintaining the highest possible level of privacy that other digital means of payment cannot offer in the same form. The digital euro would be a European means of payment, unlike the major card and payment companies that currently dominate many parts of the European market. In the end, of course, it is up to everyone to decide for themselves whether they wish to pay with a digital euro – or whether they prefer to stick to the payment methods they are accustomed to using.
But what’s in it for the public? Is the digital euro safer? Is paying with it cheaper? Or quicker?
Central bank money offers the highest form of security. Another thing that’s certainly very important for people is that the digital euro should make paying more convenient, cheaper and quicker, too. As with cash, they should not have to bear any of the costs. And retailers, who at the moment are sometimes having to pay hefty fees to payment service providers, could also benefit from the addition to the payments market. On top of that, there’s the fact that payments with the digital euro could be settled within a matter of seconds. We’d like real-time payments to become the new standard.
But won’t retailers smuggle the costs through to customers via their prices?
Our expectation would be that retailers would have to pay fewer fees for the digital euro than they’re currently paying to the large card networks. The Eurosystem itself will do its bit, as the central banks won’t charge any fees for background processing of the digital euro. At the end of the day, this kind of system obviously needs funding to operate. Retailers and banks will have to play their part. And so, of course, will we – us central banks will provide the infrastructure. It is my firm conviction that a digital euro could contribute to a more efficient, resilient and innovative payments space that will ultimately benefit all stakeholders.
The plan is to have a limit on the amount of digital euro that can be held in a single wallet. At the same time, you cite a fail-safe nature as one of the arguments in favour of central bank digital currency. But this idea of being default-proof is something that’s more an issue for large amounts, not so much for small ones, right? Isn’t deposit protection enough there?
The question is how it’s ultimately going to be set up. By having a holding limit, we want to prevent too much liquidity from flowing out of banks in one go. Take the case of Credit Suisse in March of this year; customers were, at times, withdrawing in excess of CHF 10 billion per business day. That shouldn’t be able to happen with a digital euro. And to keep payments convenient, we’re working on enabling automatic loading of wallets for times when the limit’s too low.
Sometimes the digital euro is also described as bitcoin issued by official authorities. But lots of people who invest in bitcoin do so because there’s a limit to how far the money supply can be expanded. So they’re betting on deflation, that its value will go up. The digital euro will not be able to offer this – or will there be some kind of upper limit on the money supply there as well?
No. But we don’t consider the digital euro as a state-issued substitute for bitcoin, anyway. Bitcoin is a speculative instrument, not a currency. Bitcoin is completely unsuitable for retail payments. The digital euro, meanwhile, is intended to be used exclusively as a means of payment. That said, the reference to bitcoin is correct in one regard: we, too, are keen to leverage the opportunities presented by technological progress in payments and, in a digital world of the future, be equipped for technological options that we don’t even necessarily know exist yet. Finding solutions that are in the interests of all citizens – that’s the most important thing that we’re striving for.
One of the fears bound up with the digital euro for some people is the idea that it could crowd out cash in the medium term. Can the Bundesbank give some kind of guarantee that cash will forever be firmly entrenched?
What’s certain is that we as the Eurosystem will continue to provide cash. The fact that we’re working on coming up with a new design for euro banknotes and are specifically involving the public in that process goes to prove it. We wouldn’t be doing that if our plan was to let cash die out. And, at the same time as its proposal on the digital euro, the European Commission also published a legislative proposal aimed at legally guaranteeing acceptance of and access to cash. We are very pleased about that. I really do not know of anyone in the Eurosystem who is considering abolishing cash.
But cash usage is already falling year by year. If the digital euro succeeds, won’t it just fuel the trend?
Maybe, but not necessarily. The digital euro is not intended to replace cash; the point is to bring it in as a complement to cash. Amongst other things, it’s for situations where it isn’t possible to pay with cash, like when shopping online. As I see it, there’s enough room in our economic landscape for both – cash and cashless means of payment, such as the digital euro.
Many people are concerned about whether it’s possible to pay anonymously with a digital euro or whether all payments will be open to monitoring from above in future. What is the state of play there?
For us in the Eurosystem, data privacy is particularly high on the agenda when it comes to the digital euro. In Germany, especially, the protection of personal data matters hugely to members of the public. That’s been clear when we’ve surveyed users. So one thing’s for sure: the identities of users wouldn’t be known to central banks. And banks and other payment service providers would have only limited access to personal and transaction-related data, enabling them to adhere to anti-money laundering and counter-terrorist financing requirements and comply with the relevant European legislation.
On the Governing Council of the ECB, there’s often a collision of different ideas from different countries. Are there points relating to the digital euro, too, where views diverge between euro area countries and there’s the potential for arguments?
There certainly are differences between the euro area countries in terms of views on the digital euro. We’re working very well and constructively together in the Eurosystem’s project team – there’s calm debate on all issues.
Deutsche Bank has said in studies that it’s not yet certain whether the digital euro will ultimately manage to gain a foothold in day-to-day life. Is that a concern for you?
At the end of the day, it obviously depends on uptake by the people. That’s why we need to spread the word about the project, and show people its many benefits. If we introduce the digital euro, it will be a success – of that I am convinced.
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