The European Central Bank, which will shortly begin negotiations with technical suppliers to its digital euro pilot, is becoming an important and intriguing outlier in pursuit of a retail central bank digital currency. As it begins the ‘preparation phase’, it seems to be moving towards a retail CBDC with more resolve than other jurisdictions.
OMFIF’s Future of payments 2024 found that enthusiasm for linking CBDCs in cross-border payments more than halved over the last year, with interlinking instant payments systems becoming the preferred option. A forthcoming OMFIF survey finds that 30% of central banks are slowing down their implementation of CBDCs, with two-thirds viewing their timeframe as between six years and never.
India’s United Payments Interface and Brazil’s PIX are examples of initiatives where the public sector has pressed ahead with a new infrastructure that works within the existing framework of regulated financial institutions, but are not CBDCs.
China, which is running an important CBDC pilot with soggy initial adoption, reengineered it two years ago to provide a zero-balance option that draws from existing accounts at banks rather than expect users to carry around digital renminbi in their People’s Bank of China digital wallet.
The Federal Reserve says it is still thinking about CBDCs, but wonders whether such an initiative ‘could improve on an already safe and efficient US domestic payments system’. Populist resistance to the idea that the government might supervise cash more intrusively than it does now lurks in the background.
The Bank of England is punting the ball down the road for the time being with a ‘design phase’, while on the wholesale side quietly revolutionising the way real-time gross settlement can be accessed for digital assets.
The importance of retail public money
The distinction between CBDCs and IPS may sound arcane but is fundamental. The latter sees the theoretical disappearance of public money for retail digital payments, even if state systems might be involved.
Although an official decision awaits relevant European Union and national legislation, the ECB is vocal about the demise of retail public money. It seems willing to resist some of the lobbying from financial institutions worried about their transaction services businesses and – almost certainly wrongly – their deposits. Officials wearily point out to them that there is no good reason why unremunerated CBDCs would be more popular than physical cash now is.
Why does the ECB cleave to the idea of public retail money? Ulrich Bindseil, director general of market infrastructure and payments, and Richard Senner, formerly of the directorate general, macroprudential policy and financial stability, both at the ECB, reiterated why in a paper rebutting misconceptions of a CBDC’s potential economic impact. In short, they expect an ecosystem entirely dominated by private money to increase rents on payment services, and they worry about the deleterious impact on the central bank balance sheet.
A non-renumerated CBDC would preserve important seigniorage income, the ECB argues. It is also trying to solve the imperative to digitalise the European economy while squaring that with the persistent – but declining – popularity of cash for retail transactions. Unlike in other jurisdictions such as the UK, the ECB still has the opportunity to hang onto the use of cash if it innovates and rolls out a CBDC at pace.
The ECB and the Commission are also eyeing ‘strategic autonomy’. In practical terms, it means creating a European alternative to American-owned payment services providers. Attempts to do this have not yet been regarded as successful. The ECB has been shopping for suppliers of services to the digital euro pilot, which must be owned and run by EU entities.
Although this policy is comprehensible, especially in a world reintroducing protectionism and mercantilism, many private sector suppliers, even European ones, raise their eyebrows about whether this will work well in practice. Central banks continue to report in OMFIF surveys that they will need to acquire very complex services from the private sector for cybersecurity and offline payments, for which the best providers might not be in the EU. One non-European PSP told OMFIF at a meeting: ‘they will shut us out, make mistakes, invite us back’.
‘Successful, but not too successful’
It would be wrong to assume the digital euro will get bogged down in the legislative mire. Officials told us at an OMFIF meeting that the new Commission remains committed to the programme. The idea that populist-infused national parliaments will thwart it is taken less seriously than a year ago.
Bindseil in the past has suggested that the digital euro should be ‘successful, but not too successful’. This means preserving a role for public retail money, without crowding out a private sector that needs to develop European digital payments prowess in pursuit of strategic autonomy.
This will no doubt depend on the yet-to-be-finalised compensation models for payment players and merchants. Seasoned observers don’t seem to expect the adoption failures seen elsewhere. At the same meeting, which comprised a mix of central banking, commercial banking and fintech players in Europe, a straw poll that asked whether there will be 20% market share for payments for the digital euro in 20 years saw near unanimous agreement.
Challenges remain. Alongside the choice of business model, which needs to strike a balance between encouragement and restraint, holding limits – which will be low – are yet to be finalised, as well as offline models.
In the end the use of cash is somewhat a function of the public’s relationship with the fiscal authorities. There is a surprising number of apparently broken contactless payments machines at the merchants in this author’s London neighbourhood, for example. Willingness to pay tax will no doubt remain beyond the control of central banks, whatever the format of money.
John Orchard is Chairman of OMFIF’s Digital Monetary Institute.
