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Governor Signe Krogstrup's speech at the
Frankfurt School of Finance and Management

about Money and Payments: The Five C's
19 February, 2024

CHECK AGAINST DELIVERY

Introduction

It is a pleasure and an honour to be here and to speak at the new Centre
for Central Banking at the Frankfurt School of Finance and Management. I
want to thank Prof. Jens Weidmann for inviting me. And I would like to
congratulate all of you on the establishment of this new centre. I am con-
fident that we can expect many valuable insights on topics that are high
on the central banking agenda in the coming years.

One topic high on this agenda is also my topic for today: digital and
technological developments in money and payments, and implications
for the fundamental questions of trust in money, financial stability and
robustness of our payments infrastructure.

The landscape of money and payments is constantly evolving. In the past
decades, money and payments have increasingly moved from banknotes
and coin to digital bank deposits with associated card and app payments
in many countries. We have been particularly early movers in Denmark. In
the past five years alone, I stopped carrying cash, got rid of my physical
wallet, and largely stopped visiting my bank except online. I have instead
added several new types of digital means of payment to my accounts and
phone. I am far from being a unique case. Large parts of the Danish pop-
ulation are following this trend, starting with the young, but the older
segments of the population are catching up. In this way, we are not un-
like other Scandinavian countries. And many other countries are currently
heading in a similar direction.

There are important advantages to the increasing use of cards and other
forms of digital payments. However, developments also bring up con-
cerns, notably about the declining use of cash, the trust in money and the
robustness of the payments infrastructure. Moreover, cyber security has

Page 1 of 9

become increasingly important. Meanwhile, crypto-based technology is
giving rise to new types of assets that may or may not become more
broadly adopted. And finally some central banks are considering intro-
ducing central bank digital currencies (CBDC).

The keen listener may have noticed the five C's of these developments:
Cards, Cash, Cyber, Crypto and CBDC (Slide 1). All of these have implica-
tions for central banks, in different ways. I will organise my talk today to
around these five C's.

I am delighted to address this topic here in Germany. There are similari-
ties between Germany and Denmark in both practice and approach when
it comes to the five C's. But there are also profound differences, that can
be a source of learning and inspiration. So, it is my hope, that I can offer
some food for thought and issues for discussion today.

Money is trust and convenience

The money we use, and the way we pay, have always evolved. However,
the constant throughout history has been that money has three attrib-
utes, namely that it serves as a medium of exchange, a store of value and
a unit of account. It requires trust for money to have these attributes
(Slide 2). Trust has fittingly been called the soul of money. In earlier
times, gold, other precious metals or gems typically performed the role
of money. Value and trust were ensured by the scarcity and use-value of
the commodity, for example its use in jewellery. Money later evolved into
more convenient and divisible notes and coins, and were in many coun-
tries linked directly to the value of gold - the Gold Standard.

However, gold was not always sufficiently stable in value. The link to gold
was eventually replaced with fiat money as legal tender issued by central
banks. The trust in fiat money is ensured through the credibility of the
issuing central bank's commitment to uphold its store of value and means
of payment functions.

Cards and other digital means of payment are on the rise

This brings me to the first C, cards in short, or more broadly, new digital
means of payment. Since the second half of the 20 century, new and
more convenient versions of fiat money, and particularly the means of
payment attributes associated with it - have evolved. Checking accounts

1 See Agustin Carstens, Digital currencies and the soul of money, Speech at Goethe University's Institute for Law
and Finance conference on "Data, Digitalization, the New Finance and Central Bank Digital Currencies: The Fu-
ture of Banking and Money", 18 January 2022.

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issued by commercial banks are now accessed via the Internet for instant
digital transfers to other accounts. Associated payments solutions such as
debit cards or instant payments apps are gaining ground. In short, tech-
nological development is constantly enabling new methods for making
payments faster and more convenient.

The chart on slide 3 shows that the use of payment cards and mobile
payment apps in Denmark has grown from below 20 per cent of pay-
ments in physical retail trade in 1990 to over 90 per cent today.

This fast adoption is tied to the joint public-private approach to introduc-
ing broad-based digital solutions early on in Denmark. Notable develop-
ments include the national debit card introduced already in the 1980s,
the development of unique digital verifiable ID's covering the entire pop-
ulation, and a statutory duty as well as right for all Danes to have a bank
account with payments features.? Underlying this joint approach is a high
level of trust in the authorities.

Another important driver is demand for safety and convenience. Digital
means of payment are considered safe and - for many - more convenient
than cash in Denmark. One example is the highly popular Danish national
mobile payments solution, MobilePay, introduced back in 2013, which
allows for instant payments directly between private individuals' bank
accounts. It is offered by all banks and on a joint platform developed col-
laboratively by the financial sector and Danmarks Nationalbank. 90 per
cent of Denmark's population currently uses this app.

A shift towards digital payments and away from cash takes place in many
other countries.

Cash is still needed although its use for payments has declined

This brings me to cash, my second C. The mirror image of the rise in digi-
tal payments is a decline in the use of cash in payments. However, as
shown on slide 4, with important differences across countries. I note that
cash is used extensively here in Germany, with about three in five pay-
ments in physical retail trade. The use of cash has fallen to particularly
low levels in Scandinavian countries, with only about 10 per cent of pay-
ments in physical trade in Denmark. This drop is entirely demand driven.
Reducing the use of cash is not, and has never been, a goal of the author-

2 The requirement for all Danes to hold a bank account ensures that all payments from the authorities to citizens,
such as state pensions or tax refunds, are digital. The right for citizens to have a basic account is ensured
through EU regulation.

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ities. Cash is legal tender and the legal requirement for retailers to accept
cash payments remains in Denmark. And cash does remain in use for
payments although at a lower level. From surveys, we know that some
wish to use cash exactly because it is settled physically and does not re-
quire the use of digital devices. Some mention the wish for anonymity.
Others find transactions in cash to be easier and simpler to keep account
of.

We expect these reasons for using cash to persist and for cash to be in
demand for payments for quite some time. To make sure cash remains fit
for purpose, we launched a series of new strategic cash initiatives last au-
tumn. We are preparing to issue a new series of banknotes, with state of
the art security features in 2028-2029. We are recalling older bank notes.
We are also phasing out the largest denomination bank note in Denmark,
the 1,000-krone note. Our mandate for issuing bank notes and coin is to
ensure its safety and efficiency in payments, and the 1,000-krone note
does not contribute to this goal. It is rarely used for payments, as 9 out of
10 cash payments in Denmark are below DKK 500. However, it is more
often than other notes subject to counterfeiting, and, according to Dan-
ish police, used in various type of financial crime.

The shift from cash to digital payments contributes to efficiency in pay-
ments, i.e. the average cost of retail payments has declined, benefitting
all citizens.

As payments move from central bank issued bank notes to digital pay-
ments provided by private entities, concerns are also raised. One concern
regards trust in money, as private digital money is not legal tender. In
Denmark, we see no signs of such lack of trust despite the high level of
digitalisation. Few Danes seem to distinguish between private and central
bank issued money, trusting both. Rather, we see that trust in private dig-
ital money and payments is linked to trust in the financial system and the
digital infrastructure. Notably, instant payment features seem to enhance
trust. Trust is supported by regulation, supervision, deposit insurance,
and overall macroeconomic and financial stability.

Another concern raised is that the shift to digital money and payments
can also have implications for the robustness and resilience of the pay-
ments infrastructure. Digital disruptions can affect access to digital pay-
ments. And access to means of payments is critical to the functioning of
the economy. So, how to best ensure a robust and resilient payments
system? First, note that cash might not be immune to digital disruptions,

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and hence is no panacea. This is notably because the circulation and dis-
tribution of cash has become highly digitalised.

Instead, key for resilience is redundancy. If one payment solution be-
comes unavailable, there should be widely used alternatives to switch to.
Therefore, it is crucial that there is access to several different broadly ac-
cepted payment solutions, including cash, card schemes and mobile
payment solutions.

In addition to redundancy, we see offline card payments as the most im-
portant payment contingency measure in Denmark. The technology is
already available and implemented, and we are working to broaden its
application. It enables card payments to function offline on payment ter-
minals, within limits, until a disruption is resolved. We estimate that of-
fline card payments have the potential to cover most Danes' basic spend-
ing needs for up to ten days.?

Cyber security is increasingly important

A potential disruption could be linked to cyber treats, and this brings me
to my third C, namely the emergence of cyber threats alongside digitali-
sation. The cyber threat has been with us for some time already, but is
increasing with society's reliance on digital solutions. Cyber attack capa-
bilities among states and criminals are also increasing, and there is grow-
ing uncertainty due to geopolitical tensions.

Successful cyber attacks have the potential to threaten financial stability,
if for example payment systems are disrupted. For this reason, central
banks are engaged in enhancing cyber robustness, jointly with other au-
thorities and the financial sector.

This requires another toolbox because - from a macroprudential point of
view - cyber risks are very different from financial risks such as credit and
liquidity risks. Cyber attacks affect operability. Operational tools are
hence required.

Due to the high degree of interconnectedness in the financial system, no
private entity or institution can deal with the threat from cyber alone.
Therefore we need to collaborate and share information, and this re-
quires trust amongst the different stakeholders.

3 See Frederik Reebild Kjemtrup, Offline card payments as a payment contingency measure, Danmarks National-
bank Analysis, No. 17, November 2023.

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In 2016, Danmarks Nationalbank took the initiative to establish a public-
private collaboration forum called Financial Sector forum for Operational
Resilience, FSOR (Slide 5). Its objective is to enhance operational resili-
ence across the financial sector, including resilience against cyber at-
tacks.

The work is based on a sector-wide risk analysis as foundation for priori-
tising joint mitigating actions.

The Danish cyber test programme, TIBER-DK, is a highly appreciated
cyber-specific tool for increasing cyber resilience. TIBER is short for
Threat Intelligence-Based Ethical Red-Teaming. Our programme was one
of the first of its kind in Europe when we launched it in 2018. The frame-
work is based on TIBER-EU, developed by the European Central Bank.
Our experience is that TIBER is uniquely helpful in generating insight on
how to protect against, detect and respond to advanced cyber attacks.
The TIBER testing approach is spreading to the entire EU via the Digital
Operational Resilience Act, DORA, applicable from 2025. Broader use of
TIBER will be a significant contribution to increasing the cyber resilience
of the European financial sector.

Beyond prevention it is also vital to have a crisis management response
plan that can be activated if a system wide incident occurs. This is also
something we address within FSOR.

Prevention and crisis management planning are crucial, but can only take
us so far. Each individual institution has the important responsibility to
prepare and increase its own robustness.

Crypto-based technology gives rise to new types of money and financial
products, and potentially new risks

The fourth C stands for crypto, a shorthand reference to the financial
products and services based on distributed ledger technology (DLT),
such as Blockchain. Some have voiced concern that unregulated crypto-
assets may substitute and perhaps crowd out national currencies, or that
the financial system may become subject to new severe risks, which may,
in turn, challenge trust in money.

When discussing crypto, we should distinguish between the technology
on the one hand, and the products and services currently based on this
technology on the other.

In essence, the technology itself is a way of hard-coding the supply or is-
suance of the assets and allowing for transparency of transactions. It is

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possible that this technology may help address some shortcomings and
problems in the current plumbing of the global financial system. How this
pans out is unpredictable, however, and the value added not yet clear.*

But so-called crypto-assets have already entered the global financial sys-
tem. Some of these have seen a significant increase in interest as well as
market capitalisation in recent years.

Let me start with the crypto-assets that are unbacked such as Bitcoin and
Ether. These are sometimes referred to as crypto currencies, but that is a
misnomer. They do not feature any of the three attributes of well-
functioning money. And are thus unlikely to be adopted as substitutes for
money in countries where existing money is stable and well-functioning.
They are at best speculative and risky assets. The lack of an issuer that
can be regulated and subjected to oversight also makes crypto-asset
markets vulnerable to market manipulation and fraud.®

Despite the risks associated with these assets, there are no signs that un-
backed crypto-assets currently threaten financial stability. As illustrated
on slide 6, vulnerabilities related to crypto-assets can affect the financial
sector through direct investor exposures and interconnections with the
traditional financial sector. Despite the increase in market capitalisation,
adoption remains low on both fronts. We recently estimated that less
than 4 per cent of Danish households own crypto-assets.° And most in-
vestors have invested modest amounts, for now. Financial institutions in
Denmark, such as banks and pension funds, also have low exposures.
Similar assessments of exposures appear from surveys in other countries.
We follow closely new developments in these exposures.

So-called stablecoins, also based on DLT, are a different matter. These
are issued by an institution with a balance sheet, allowing for stable val-
ue, as well as potential regulation and supervision. The value of a stable-
coin is ensured by backing it with assets that are stable in value - hence
its name. Stablecoins are often issued to provide a means of payment

4 One example is the work currently conducted in the central banks and BIS Innovation Hubs on how crypto
technology may help reduce inefficiencies of cross-border payments. See for example "Project mBridge: exper-
imenting with a multi-CBDC platform for cross-border payments" that investigates how a multiple-central bank
digital currency common platform for wholesale cross-border payments might reduce high costs and opera-
tional complexities and "Project Dunbar: international settlements using multi-CBDCs" that looks into how a
common platform could enable cheaper, faster and safer cross-border payments.

5 See, for example, United Nations Office on Drugs and Crime, Casinos, Money Laundering, Underground Bank-
ing, and Transnational Organized Crime in East and Southeast Asia: A Hidden and Accelerating Threat, January
2024.

See Benjamin Christiansen and Rasmus Bobek Sgndergaard, Crypto-assets: Risks, regulation and usage in
Denmark, Danmarks Nationalbank Analysis, No. 16, November 2023.

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that can be used on a platform based on DLT, typically with a stable val-
ue against a major national currency. A stablecoin thus borrows the sta-
bility of the underlying currency, and hence the trust and credibility of the
issuer of that currency, i.e. the central bank. This is not unlike bank de-
posits, with similar potential risks and advantages. One risk is bank run
risk, which is more prevalent in stablecoins as long as they are not regu-
lated. An alternative to stablecoins is tokenised bank deposits, DLT-
representations of traditional bank deposits, with the current advantage
over stablecoins that they are already regulated and may therefore be
safer.

With proper regulation, risks associated with stablecoins can be mitigat-
ed, and a level playing field created with other assets and means of pay-
ment. With proper regulation, they can have the potential to play a role

in the payments and settlement of digital asset trading on DLT, if this be-
comes prevalent.

The first steps are taken toward regulating crypto-assets in Europe, with
the new EU Markets in Crypto-Assets (MiCA) regulation.' However, more
will be needed to close the regulatory gap between traditional and cryp-
to-based finance.

Central banks are looking onto issuing so-called CBDCs
CBDC is the final C for my talk today.

Central banks are keeping a watchful eye on recent changes in money
and payments. Some central banks are considering whether to issue their
own digital currencies - so-called CBDCs.

The term CBDC is usually taken to mean one of two things. First, it can
refer to so-called wholesale CBDC, describing central bank digital money
available only to financial institutions. Central banks already issue whole-
sale digital money, and the concept of a wholesale CBDC refers to mak-
ing such wholesale money DLT-based. As such, it is a question of tech-
nology, which could become useful if DLT were to become more promi-
nently used in the financial system.

Second, CBDC can refer to retail CBDCs: Digital central bank money is-
sued directly to households and businesses, irrespective of technology.
Households and businesses currently do not have access to digital de-

7 MiCA entered into force on 30 June 2023 with some provisions becoming applicable after an implementation
period of 12 and 18 months.

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posits at the central bank. Retail CBDC could - depending on how it is
designed - change the structure of the financial system and the issuance
and distribution of money.

The reasons given for the interest in issuing CBDC vary from country to
country. Examples are shown on slide 7. Some see CBDC as an anchor to
ensure trust in money as cash declines. Others see it as a potential bul-
wark against foreign currency substitution, or as a way to increase com-
petition in markets for digital payments. We acknowledge the concerns
underlying these and other reasons. However, in Denmark we currently
do not see the possibilities for a CBDC to address them given the specific
circumstances we have in Denmark. I already mentioned how trust in
money and payments do not seem to be affected by the declining use of
cash in Denmark. More fundamentally perhaps, with the well-functioning
digital payments infrastructure already in place in Denmark, it is not clear
how a CBDC would offer added value and compete on trust and conven-
ience, and hence be adopted in Denmark.

The case for issuing CBDC may look very different in other countries, with
different institutional setups, culture and preferences, and payments sys-
tems.

And countries in our close vicinity are considering introducing CBDCs.
Therefore, we follow the development closely and reassess the argu-
ments for and against our own CBDC on an ongoing basis.

Conclusion

Let me conclude by noting that we are in the midst of an ongoing digital
transformation of money and payments, characterised by my five C's.
While technology has changed the nature of money throughout history,
one constant has remained, namely that money has three attributes -
safe store of value, medium of exchange and unit of account. It is the re-
sponsibility of central banks, and directly in the mandates of many, to en-
sure these attributes, so that money and payments can function as the
backbone of a well-functioning economy.

I hope that this has given you food for thought. It has been a pleasure
speaking here today. Thank you.

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DANMARKS
NATIONALBANK

Money and Payments: The Five C's

Governor Signe Krogstrup, Danmarks Nationalbank
Frankfurt School of Finance and Management, Centre for Central Banking, 19 February 2024

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Digital payments are on the rise in Denmark

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91
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Source: Danmarks Nationalbank, Payment statistics and own calculations.

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Cash is still needed, although its use for payments
has declined

Cash payments at point of sale as proportion of all payments

Per cent
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80
70
60
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DK* (2023)
SE* (2022)

NO* (2023)

Note: EA* includes the 19 countries which had adopted the euro in 2021 and is based on the 2022 SPACE report. Countries marked with * are based on other studies including national surveys. Note that a direct comparison
between the countries is subject to some uncertainty due to differences in the applied methods and years for measuring the use of cash.

Source: Study on the payment attitudes of consumers in the euro area 2021 (SPACE), Danmarks Nationalbank, Sveriges Riksbank, Norges Bank, Schweizerische Nationalbank, Bank of Canada, Federal Reserve,
UK Finance, Reserve Bank of Australia, FIS Global Payments Report 2023.
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