Digital currency

Luxembourg bankers sceptical about digital euro, while ECB sees upside

The European Central Bank is expected to unveil its digital euro project in the autumn. The ECB’s Ulrich Bindseil addressed financial industry concerns during a conference organised by the Luxembourg Bankers’ Association at Spuerkeess’s 19 Liberté site, 5 July 2023. Photo credit: ABBL/Linkedin

The European Central Bank is expected to unveil its digital euro project in the autumn. The ECB’s Ulrich Bindseil addressed financial industry concerns during a conference organised by the Luxembourg Bankers’ Association at Spuerkeess’s 19 Liberté site, 5 July 2023. Photo credit: ABBL/Linkedin

The European Central Bank’s digital euro project is raising a lot of questions, not to say mistrust, among bankers in Luxembourg’s financial centre. Ulrich Bindseil of the ECB and Ananda Kautz of the Luxembourg Bankers’ Association (ABBL) share their perspectives.

The European Commission has proposed a framework for the digital euro, a public currency accepted everywhere, which would complement existing private solutions. While it is up to the European commission, parliament and council to create such a legal framework, it is up to the European Central Bank to decide if and when a digital euro would be appropriate.

The subject is considered strategic in Frankfurt. It worries banks and consumers still seem indifferent. In an attempt to rally bankers behind the ECB’s plan, Ulrich Bindseil, director general, market infrastructure and payments, accepted an invitation from the Luxembourg Bankers’ Association (ABBL) to discuss the issue at a conference earlier this month. He also answered questions from Delano’s sister publication Paperjam. As did Ananda KautzAnanda Kautz, head of innovation, digital banking & payments at the ABBL.

The need does not come from the market but from a strategic decision by the ECB.
Ananda Kautz

Ananda Kautzhead of innovation, digital banking & paymentsLuxembourg Bankers’ Association (ABBL)

The digital euro on which the European Central Bank is working is a CBDC (central bank digital currency). And its project is based around two axes: a digital euro for commercial use by the general public and a digital euro for B2B use. “Two completely different approaches,” said Kautz. “And the retail digital euro is the most advanced part of the project.”

According to Kautz, the ECB’s approach is “geopolitical.” This means designing a technologically robust alternative to cash, enabling payments to be made on any occasion, even offline, i.e., in the event of network and internet failure, and positioning itself in the face of the arrival of private electronic currencies.

For the average citizen, the difference with the electronic payment methods already in use will not be obvious. “This is all the more true given that the payments system in Europe is now very advanced,” stated Kautz. “The need does not come from the market but from a strategic decision by the ECB.” It is an approach that mortgages the commercial success and therefore the adoption of the digital euro by consumers.

Kautz sees the interest, and the use cases, more in the international context of wholesale banking and corporate finance. “Today, cross-border payments are costly, slow and not very transparent. So if we were to switch to a digital currency in the future, where we can have instantaneity and transparency thanks to the blockchain and smart contracts, all in a secure way, that would add value. Especially if you add programmability. With the increasing use of artificial intelligence, machines could analyse needs and place orders automatically. And then, thanks to blockchain, we could programme payments between machines, for example. As a banking sector, this is the use that interests us most. A use that is not without strategic implications. A well-designed currency that meets the needs of users could become the benchmark currency for international trade.”

Wrong target

In Kautz’s opinion, it would have been better to start rolling out their digital services in the B2B sector. “It was simpler to start with the retail side for the ECB, but that’s not necessarily where we see the most added value.”

When asked where the advantages and disadvantages are for the banking sector and the digital euro market, the disadvantages outweigh the advantages. While the ABBL gives the ECB credit for the fact that the Frankfurt institution’s objective is not to destabilise the financial sector, it is concerned about the infrastructure costs that the roll-out of the digital euro will cause.

The ABBL is also cautious about the risk of the digital euro shifting consumer money from the balance sheets of commercial banks to the balance sheets of central banks. This could lead to liquidity problems, which would have a knock-on effect on lending activities. Luxembourg banks would welcome a prior impact study on this precise point.

Preserving Europe’s independence from external private suppliers.
Ulrich Bindseil

Ulrich Bindseildirector general, market infrastructure and paymentsEuropean Central Bank

In the face of these criticisms, the ECB--which, together with the European Commission, will be proposing a complete legal framework this autumn--is insisting on the complementary nature of the digital euro, on its inclusiveness (it will be accessible to everyone, “even users with limited financial or digital capabilities”), on its being free of charge, on its general acceptance and on the fact that cash will not disappear.

Bindseil stated that “the ECB’s objective is to ensure that our currency remains adapted to the digital age. By offering an additional means of paying with public money, we would be ensuring the resilience of our monetary system. In addition, the digital euro would provide the raw material for new innovations in the European payments sector.”

In terms of use cases, he pointed out that “the digital euro could be used to pay at any time and anywhere in the euro area. The ECB is currently studying a number of payment scenarios, in particular person-to-person payments and consumer-to-business payments, including online and physical purchases. For each of these situations, with the exception of online purchases, users would be able to pay with a digital euro even without an internet connection or digital device.”

There are only advantages to the digital euro, Bindseil argued: “Consumers would benefit from something that does not currently exist on the market, namely a European means of payment that is widely accepted and distributed in all eurozone countries. With the certainty that their personal information is processed according to the highest possible standards. For merchants, the digital euro would provide access to a European solution that would enable them to receive payments instantly from anywhere in the eurozone. The digital euro would also offer merchants greater choice, which would encourage more competitive pricing. We want the costs associated with the digital euro to be low for merchants.”

Innovation tool

And for banks that fear being marginalised, Bindseil believes that the digital euro could be a means “to continue to innovate and develop new services for their customers.” Pointing to the compulsory distribution of the digital euro by banks, he said that they “will play a key role.” Bindseil likewise believes that the “digital euro would also be a catalyst for innovation in the private sector. It could enable private providers to develop new, additional solutions that could offer value-added services. Overall, a digital euro could strengthen cooperation between the public and private sectors, while stimulating competition in the European retail payments industry, making it stronger and more resilient.”

On the question of financial stability, Bindseil confirmed that there will be a ceiling on the use of the digital euro for consumers--a ceiling of €3,000 per account is being mooted in the discussions. But apart from facilitating everyday payments, the major advantage of the project remains “preserving Europe’s autonomy from external private suppliers.”

Read the original French version of this article on the Paperjam site