The Landscape in 2030: CBDCs or Private Digital
Payment Solutions?
Central Bank Payments Conference
29.06.2022 | Athens | Burkhard Balz
1 High activity among central banks on CBDC
2 Good reasons to come up with CBDC
3 CBDC a new offering in often well-occupied markets
4 Conclusion
1 High activity among central banks on
CBDC (Central Bank Digital Currency)
Ladies and gentlemen,
It is a pleasure for me to be here in Athens and to speak to you about central bank
digital currency (CBDC (Central Bank Digital Currency)) in the vicinity of the ancient
Agora where - if I am not mistaken - Aristotle discussed questions of ethics,
economics and politics with his disciples while walking in the shade of the Peripatos.
Now I know full well that philosophers from antiquity cannot provide us with any
immediate input on CBDC (Central Bank Digital Currency). But take it from me: even
in our discussions about a digital euro Aristotle does play a role from time to time. I
will come back to this at the end of my speech.
CBDC (Central Bank Digital Currency) is a digital form of money, issued by the
Central Bank, and in its retail version accessible for the general public. According to
the latest BIS (Bank of International Settlement) survey, [1] more than two-thirds of
central banks worldwide will possibly issue, or are likely to issue, a retail
CBDC (Central Bank Digital Currency) in either the short or medium term. As a result,
retail CBDC (Central Bank Digital Currency), as a new means of payment for
everyday transactions, may exist in at least some countries at the end of the decade,
so by 2030.
At the moment, there are only two countries where a retail
CBDC (Central Bank Digital Currency) has actually been launched: the Bahamas
launched their digital Sand Dollar in October 2020, and Nigeria issued an eNaira in
September 2021. Meanwhile, the Eastern Caribbean Currency Union is piloting
DCash, and China is running extensive pilots with its eYuan.
All these countries had very different motivations for these endeavours: logistical
issues concerning the proper supply of cash across a widely spread archipelago in
the Bahamas, support for financial inclusion in Nigeria, and in China the eYuan ranks
as a state-run alternative to the two quite dominant private payment solutions.
In many other jurisdictions, for example in the United States and the United
Kingdom, central banks have also initiated public debates on the possible launch of
a CBDC (Central Bank Digital Currency). I am looking forward to the results and the
conclusions that will be drawn from them.
In the euro area, we are one step ahead. We published a report on the groundwork
for a digital euro in October 2020 and launched our Eurosystem project eight
months ago. The aim is to investigate whether we should introduce a digital euro
and what it might look like. As in all the other countries the question arises, why are
we doing this? If you asked the average consumer on the street, the majority would
probably not see an immediate need for something called the "digital euro". But
would the response have been any different if Steve Jobs had asked whether we
needed a thing called the "iPhone" at the beginning of this century?
2 Good reasons to come up with CBDC (Central Bank Digital Currency)
As I said, central banks have different reasons to consider the introduction of
CBDC (Central Bank Digital Currency) a worthwhile undertaking. In the euro area,
we are seeing decreasing demand for physical cash which, up to now, is the only
form of central bank money that is available to the general public. But cash isn't
suitable for payments in the digital world, like in e-commerce. Therefore, it could be
beneficial to additionally offer a digital version of cash to support digitalisation in
the European Union. Let me clarify: the digital euro would complement cash, not
replace it. We will stick to our current practice of market neutrality: consumers
should choose their means of payment at their own discretion.
Some also take the view that a digital euro is not needed because other innovative
means of payment like stablecoins, already exist. But the recent turmoil has clearly
illustrated that not everything that glitters is gold. And even if stablecoins were
properly regulated, like "e-money" in the European Union today, there would still be
issues such as the risk of fragmentation along witch a lack of interoperability and
broad acceptance. Issues, ladies and gentlemen, that a digital euro would, in any
case, remedy from the start.
Moreover, there are further reasons that might be unique in Europe compared with
other jurisdictions.
Since the single market for cashless payment solutions in the euro area currently
only exists for credit transfers and direct debits, both the Eurosystem and the
European Commission see the need for a pan-European payment solution, running
on European infrastructures. As of now, payment cards and online payments, too,
are still based on national structrures. And the competitors are big and financially
potent: international card schemes as well as BigTech firms with their global
offerings.
Against this background, the digital euro goes hand in hand with the political idea
of supporting pan-European infrastructure and protecting European sovereignty.
However, we need to stop regarding the digital euro and private payment solutions
as rivals. Quite the opposite: both could be integral and important parts of a sound
future ecosystem in payments:
The digital euro would be offered alongside private payment solutions.
•
There needs to be full interoperability between the digital euro and private
•
payment solutions.
Both segments will have to allow for instant payment processing, 24 hours a day,
•
365 days a year.
Banks and payment service providers will also have to play an important role in the
distribution of the digital euro. In that respect, they can build add-on services on top
of the digital euro.
According to the BIS (Bank of International Settlement) survey mentioned before,
more than 70 per cent of central banks - engaged in some form of retail
CBDC (Central Bank Digital Currency) work - think the private sector needs to play a
role in the CBDC (Central Bank Digital Currency) ecosystem. This includes various
aspects of the client-facing interface, especially client onboarding (including "know
your customer procedures") and the handling of retail payments.
3 CBDC (Central Bank Digital Currency) a new offering in often
welloccupied markets
As we have learnt: up to now, a CBDC (Central Bank Digital Currency) is uncharted
territory for the vast majority of central banks and also for the relevant legislators.
Many decisions have to be made to develop public-private partnerships to invent a
new form of digital infrastructure as well as new means of cooperation between
central banks and commercial banks.
It has yet to be worked out whether cash distribution can serve as a role model for
the distribution of CBDC (Central Bank Digital Currency), or whether a digital euro
should be considered more as a kind of new payment scheme or even like a card
scheme.
What are the most striking similarities to cash? (i) Like cash,
CBDC (Central Bank Digital Currency) is by definition central bank-issued money,
which is then conveniently put into circulation by commercial banks on their behalf.
(ii) It is expected that CBDC (Central Bank Digital Currency) will receive the status of
legal tender and thus be accepted nearly everywhere.
But there are some important differences, too. In general, we have to acknowledge
that, even from a purely technical point of view, a
CBDC (Central Bank Digital Currency) needs a much deeper cooperation with the
industry than an analogue banknote.
A CBDC (Central Bank Digital Currency) has to be developed in such a way that it is
also interoperable with the storage of commercial bank money in digital accounts.
Otherwise, it will be difficult to organise the smooth interplay between these two
types of money. And users have a strong preference to keep all their different
payment solutions in a single wallet, be they CBDC (Central Bank Digital Currency),
cards or account-to-account payments. Therefore,
CBDC (Central Bank Digital Currency) will need a kind of rulebook that governs how
it is handled among central banks, commercial banks, other providers and, last but
not least, end-users.
Let me illustrate this point in a little more detail: To be suitable for use in
applications based on distributed ledger technology (
DLT (Distributed Ledger Technologie)), a CBDC (Central Bank Digital Currency) also
has to be constructed in a token-based environment. The technical handling of
tokens might need additional rules, compared to credit transfers based on accounts.
What also needs to be organised is how a token-based
CBDC (Central Bank Digital Currency) can be made interoperable with the traditional
world of bank accounts.
The most striking difference may concern how CBDC (Central Bank Digital Currency)
is perceived by its users. Since cash can be identified as something unique by every
user based on its particular look and feel, designing a
CBDC (Central Bank Digital Currency) will be a big challenge.
As the increasing possibilities of making payments online are not really clear to the
majority of users. Accordingly, ensuring the recognisability of a
CBDC (Central Bank Digital Currency) will be a challenge. In a physical wallet, cash -
central bank money - can easily be distinguished from a card as a means of
payment. In a digital wallet, it will not be that obvious what is "behind" a
transaction - i.e. what is the source that makes a payment happen. A tokenised card
or a direct debit based on commercial bank money as a "background instrument"
might feel the same for most users.
This may sound a little odd, but we can learn from China about the communication
challenge surrounding CBDC (Central Bank Digital Currency). Because paying
digitally based on private solutions is already a well-functioning daily experience for
Chinese people, encouraging them to change their behaviour and adopt
CBDC (Central Bank Digital Currency) seems quite a burden. However, payments are
a network industry, so it is crucial to attract a broad user base as soon as possible.
For this reason, the People's Bank of China (PBoC) distributed an amount of
CBDC (Central Bank Digital Currency) for free to nudge payers to adopt it. For sure,
there might be certain features of CBDC (Central Bank Digital Currency) which could
be considered unique from a user perspective, like offline capability or a specific
focus on privacy. But since CBDC (Central Bank Digital Currency) will require close
cooperation between central banks as well as commercial banks and other payment
service providers, all parties have to reflect on the way
CBDC (Central Bank Digital Currency) can be made a convenient and widely
accepted means of payment offered in a public-private partnership.
For instance, the European System of Central Banks has to act in accordance with
the principle of an open market economy with free competition, according to its
Statute. [2] Suppressing private sector institutions that offer payment solutions
would not fit into this concept. Nevertheless, it will also take some thinking out of
the box by private players to develop entirely new solutions from scratch.
Moreover, standards, rules and procedures in the digital world might need to be
more prescriptive in order to ensure interoperability and pan-European reach. Here
comes the analogy with a payment scheme into play. However, there are a variety of
options for what such a scheme might look like, and how it is operationalised. One
might even consider cash a rather light payment scheme, as compared with the
fully-fledged card schemes operated by the international card providers. All of this
needs much more elaboration.
But one thing is certain: CBDC (Central Bank Digital Currency) will need much more
communication and cooperation among central banks, a strong commitment from
private payment service providers, and buy-in on the demand side. Payees, mostly
merchants, have to understand the clear-cut and attractive features offered by a
CBDC (Central Bank Digital Currency), and payers have to learn that
CBDC (Central Bank Digital Currency) is a "somewhat official means of payment",
offered to them by their trusted payment providers at conditions that are
transparent to them and don't involve all their data being sold to interested parties.
In this sense, CBDC (Central Bank Digital Currency) could be a core infrastructure for
new convenient private payment solutions as well as a complement to pre-existing
private payment solutions or those which might emerge in the future.
4 Conclusion
Ladies and gentlemen,
Looking ahead to the year 2030, the question of
CBDC (Central Bank Digital Currency) or private payment solutions is, in my view, not
a binary one. I am sure that, all over the world, we will find pre-existing private
payment solutions and some examples of CBDC (Central Bank Digital Currency)
payment solutions building on good cooperation between central banks and private
sector companies. Regarding CBDC (Central Bank Digital Currency) payment
solutions, I think both parties should make the most of their capabilities: central
banks offering resilient and secure infrastructures, and taking care of financial
stability, efficiency and innovation; and private actors leveraging their experience of
end-user-focused interfaces. Let us combine the best of both worlds.
Nevertheless, we all know that this is a challenge which will call for some deep,
time-consuming discussions among all the CBDC (Central Bank Digital Currency)
stakeholders. And that brings me back to what I mentioned at the beginning of my
speech. We might explore new avenues, we might implement new technologies -
but we should also benefit from the wisdom of our ancestors. So let's hear what
Aristotle has to say: "Well begun is half done." And that is still very true for our work
on CBDC (Central Bank Digital Currency).
Many thanks for your attention.
Footnotes:
1. https://www.bis.org/publ/bppdf/bispap125.htm
[https://www.bis.org/publ/bppdf/bispap125.htm]
2. https://www.ecb.europa.eu/ecb/pdf/orga/escbstatutes_en.pdf
[https://www.ecb.europa.eu/ecb/pdf/orga/escbstatutes_en.pdf] , Article 2