‘Successful, but not too successful,’ was Ulrich Bindseil’s pithy summary of how a digital euro – with a direct payments infrastructure issued by the European Central Bank – would strike the public-private trade-offs bedevilling central bank digital currency units the world over.
Bindseil, director general of market infrastructures and payments at the ECB, spoke to OMFIF about the conclusions of the investigation phase and the commencement of the preparation phase for the digital euro. A final decision to deploy it awaits approval in national legislatures. It will probably also undergo regulatory modifications, such as an obligation for merchants, payment service providers and banks to distribute and accept it.
The ECB seems to be aiming for a careful balancing act, one which is more proactive on behalf of the public sector than the Bank of England’s apparent intentions. Bindseil observed that the ECB ‘does not want cash use to decline’ but accepts it will do so. It intends to retain as many of the physical euro’s characteristics as a ‘public good’ as possible in digital form. But it is starting from a different place to the Bank of England. Physical cash in the UK is already obsolescent in payments, and banks and payments service providers have seamlessly replaced it with an electronic ‘private money’ infrastructure. Cash use for payments in Germany, in contrast, is in gentle decline but still at 57%.
The balancing act demands that the private sector, which has already solved digital payments and will continue to innovate in them, is not crowded out by a state-backed direct payments platform. It also ensures the private sector does not unduly dominate ‘network effects’ or exclude citizens and merchants without access, means or willingness to use private sector payment providers. ‘Some people don’t want to use a bank,’ Bindseil said. ‘European citizens should have something to fall back on if the private sector doesn’t work.’
Solving adoption issues
Adoption issues have so far thwarted several existing CBDCs. How will the incentives to distribute a digital euro via the private sector work alongside the ECB’s own wallet app, which would be free at the point of use for individuals? ‘That’s the tricky part,’ averred Bindseil, and is still to be finalised. ‘Ideally the digital euro will be issued via existing bank apps’, with ‘compensation not totally different from what they [PSPs] are used to’. Bindseil also noted that the private sector had benefitted from existing digital payments platforms run by central banks, such as PIX in Brazil, by cross-selling other products to users.
However, if the private sector will not help the ECB distribute the proposed digital euro, it will lose market share to the ECB itself. Who will build and operate the ECB’s digital wallet remains undecided – progressing this will be part of the planning phase that starts in November.
The domicile of the providers seems important. One driving factor for the digital euro is ‘the resilience and autonomy of European payments’. Bindseil mentioned geopolitical considerations. The ECB does not wish its public good to depend heavily on non-European providers.
European native players shouldn’t hang out the bunting just yet though. Bindseil was relaxed about the ‘churn’ in the payments provider space and relatively unsentimental about CBDC competition with the banks. Although they will be protected from deposit flight by a limit on digital euro holdings (probably €3,000), Bindseil said that competition between the banks and other financial service providers is ‘much more material’ than from the digital euro. Though not ECB policy, Bindseil had previously argued that making the digital euro bear interest would drive adoption, but commercial banks have successfully lobbied this idea away.
Although digital euro wallets are expected to offer ‘conditional’ payments, enabling seamless and cheap machine-to-machine payments, the digital euro tokens themselves will not be programmable. This arrangement prevents divergence and arbitrage between different types of euro token.
Meanwhile, Bindseil described the cross-border wholesale design for CBDCs – a technical as well as regulatory challenge which repeatedly hamstrings digital public money discussions – as ‘not advanced’. Although the focus of different projects in the Eurosystem from his, he envisaged direct links between central banks with a third-party foreign exchange layer in between. The private sector can breathe a sigh of relief there for now.
John Orchard is Chief Executive Officer of OMFIF.
Ulrich Bindseil was speaking at OMFIF’s ‘Charting the digital euro’s next steps’ event. Catch up with the broadcast on demand here.