In an email interview with Delano, Burkhard Balz, an executive board member of Germany’s central bank, the Deutsche Bundesbank, and a member of the European Central Bank’s Eurosystem high-level task force on central bank digital currency (CBDC), emphasised the benefits of the digital euro, such as enhanced efficiency, security and transparency, which would bolster European competitiveness, innovation and sovereignty in digital payments. He also addressed considerations including financial liquidity, risk management, cybersecurity and the need to strike the right balance between centralised control. Balz clarified that the digital euro is designed to complement cash, not replace or compete with it.
Balz has been a member of the Deutsche Bundesbank’s executive board since 2018 and a member of the Bank for International Settlement’s committee on payments and market infrastructure since 2021. He previously served as an MEP and held several positions at Commerzbank.
Kangkan Halder: What are the primary benefits that you anticipate the digital euro would bring to the European economy and financial system, specifically in terms of efficiency, security and transparency?
Burkhard Balz: I firmly believe the digital euro would strengthen the payments landscape in Europe. It is an opportunity for European banks and other payment providers to remain competitive, also in the face of increased competition from global players. At the same time, a digital euro would bolster European sovereignty in digital payments.
There is no doubt that introducing the digital euro should have concrete value add for consumers.
They would have a reliable and convenient payment method at their fingertips that works anytime and anywhere within the euro area, including offline.
The digital euro would be cost-effective, available free of charge for basic payment needs, and benefit individuals and merchants alike. It prioritises security and privacy and protects the personal data of payers. Furthermore, the digital euro is designed with future digital demands in mind, providing a platform for further innovation over the medium and longer term.
Overall, the digital euro aims to enhance financial transactions, support the digital transformation of our economies, and foster a robust and inclusive financial ecosystem in Europe.
A digital euro would be available alongside cash. It would be up to users to decide which payment instrument they use, just as they do with other payment products as well, like cards or instant payments.
With the potential rapid acceptance of CBDC by businesses and the public, how do you foresee this transition impacting the euro area’s financial liquidity? What measures are being considered to manage the potential risks, and is there a plan to remove cash from circulation to align with CBDC issuances?
A potential rapid uptake of CBDC could have severe consequences for commercial bank money liquidity and the ability of banks to issue loans.
That is why we envisage multiple safeguards such as individual holding limits. The digital euro should be used mainly as a means of payment, not as a store of value.
Regarding banknotes and coins: we will not remove cash from circulation.
A digital euro would be available alongside cash. It would be up to users to decide which payment instrument they use, just as they do with other payment products as well, like cards or instant payments.
Maintaining the cybersecurity and resilience of CBDC systems is crucial. Could you explain the steps that have been taken to ensure the robustness and protection of the CBDC infrastructure against potential cyber threats and attacks?
We are still in the early stages of the project so we cannot share any concrete measures just yet. However, we as central banks are very experienced in guaranteeing the robustness of payment systems, as evidenced by the smooth functioning of our infrastructures, e.g., T2 [target 2], over the last decades.
In any case, we are strongly committed to providing a high level of resilience by applying our tried-and-tested concepts, e.g., separate operating sites and closed networks, whilst also ensuring a very high standard of cybersecurity.
Centralised control is a fundamental aspect of CBDC issuance. How do you plan to strike the right balance between centralised control and maintaining the stability of the financial system, taking into account the potential impact on monetary policy transmission and financial intermediaries?
We are planning to keep the current division of labour in the banking sector in place.
This means that banks will continue to act as intermediaries to their customers, while we as central banks provide the settlement infrastructure. Customers will only be able to access the digital euro through their payment service providers.
Thus, the provision of wallets, the onboarding process and transaction management will be managed entirely by these intermediaries.
That will strengthen their role and help them maintain their relationship with customers. Financial stability will be safeguarded by applying instruments that cap holdings of digital euro.
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The introduction of CBDC may disrupt traditional banking institutions. How do you envision the impact on these institutions, and what strategies or support mechanisms are being considered to help them navigate this transition effectively?
The digital euro could spur further innovation and act as a potential springboard for pan-European solutions that could drive revenue growth for banks (e.g., revenues that currently go to non-European payment providers).
The digital euro can be a catalyst for more digitalised payment ecosystems. However, a transition of that kind takes time and careful planning.
We got the supply side on board early in the project phase, which means we gained important feedback on potential design features and could be sure the digital euro fits into the broader payment ecosystem.
A step-by-step roll-out approach, with person-to-person payments and e-commerce payments in a first release and point-of-sale payments in a later release, could also help ensure a smooth introduction for all stakeholders.
While a fully digital currency is expected to reduce transaction costs for companies and businesses, do you believe it may inadvertently have a negative impact on actual cash transactions and circulation?
The digital euro is designed to complement cash, not compete with it.
Its use cases lie mainly in the digital world; however, it could also be used at the physical point of sale.
The main idea behind the project is to give consumers a choice--there are no plans to lower or restrict the use of cash.
However, we are seeing a trend decline in cash use, albeit to different degrees across European countries. In the end, it’s up to the user to decide. We will carry on issuing cash as long as people in the Eurosystem want us to.
Facilitating cross-border CBDC transactions within the EU and beyond presents its own challenges. Could you outline some of the potential hurdles, such as regulatory harmonisation, anti-money laundering measures, and foreign exchange considerations, and discuss the strategies to overcome them?
The G20 is currently drawing up a roadmap for enhancing cross-border payments that covers all the issues you mention. We have set ourselves ambitious targets for the speed, costs, access and transparency of cross-border payments that have to be achieved by 2027.
Cross-border transactions will play a role in the future of the digital euro project, of course, but many factors--especially regulatory harmonisation and AML [anti-money laundering] regulations--are a matter for lawmakers.
In my opinion, “digital euro” is the right name because it shows exactly what we want.
Consumer protection is crucial, particularly in the digital realm. What specific safeguards and measures will be implemented to protect consumers from fraud, scams and unauthorised transactions when using the digital euro, given the irreversible nature of digital transactions?
As I have just said, we are still in the early stages of the project and the technical set-up has yet to evolve.
Measures designed to combat fraud and other illicit transactions will be an integral part of future work, not only at the Eurosystem level but also at the level of intermediaries, who can draw on extensive experience in this field.
In that respect, it is also quite clear that we will rely on intermediaries to offer the most efficient and secure means of authentication. Furthermore, this topic is a key issue in the current discussion on updating PSD2 [Payment Services Directive 2].
In times of financial crisis or potential bank runs, how do you anticipate CBDC systems contributing to financial stability and enabling the central bank to effectively manage such situations, ensuring confidence among individuals and businesses?
As I mentioned before, measures like holding limits will be introduced to ensure that banking systems function both in normal times and in times of crisis.
Lastly, in a recent by François Villeroy de Galhau, governor of the Banque de France, on 22 June 2023, he mentions ‘Cash+’ as the new name for the digital euro, describing it as an e-euro digital banknote. Is this the name considered by the ECB high-level task force?
While we see the digital euro as a complement to cash, it is intended to cover a broader set of use cases, notably in e-commerce.
The name ‘Cash+’ would suggest that the digital euro would be superior to cash.
In my opinion, “digital euro” is the right name because it shows exactly what we want, which is to make sure the euro still has a role to play in the digital world.
The email interview was conducted in July 2023.
This article was published for the Delano Finance newsletter, the weekly source for financial news in Luxembourg. .