Constantinos Herodotou: Navigating the technological revolution -
the central banker's perspective
Speech by Mr Constantinos Herodotou, Governor of the Central Bank of Cyprus, at the
11th Banking Forum & Fintech EXPO, Nicosia, 7 December 2023.
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Ladies and gentlemen, esteemed guests,
It is a pleasure to have the opportunity to speak to you at today's event, and I wish to
thank the organisers for the invitation.
In our increasingly digitalized world, technology's pervasive influence has brought about
significant changes, particularly in the financial sector. The integration of technology
into banking processes, has the potential to optimize operations, improve customer
experience and redefine interactions between financial institutions and clients. The
entry of fintechs and the expected challenge from big techs, has expedited these
changes, using platforms like social media to influence retail depositors' responses to
market signals.
Without a doubt, payments are being challenged by disruptive transformation and by
the emergence of private actors that might lead to instability and confusion about what
is money and what is not money. For example, the so-called crypto-assets are too
volatile to be considered a currency or to act as a means of payment. Stablecoins are
often unbacked by any reserves to be considered as a currency, but rather seek to
maintain a stable value through, for instance, algorithms or protocols. Moreover,
stablecoins are vulnerable to runs, as evidenced in May 2022 by the collapse of Terra,
which was the fourth-largest stablecoin at the time. Another example occurred in March
2023, following the failure of Silicon Valley Bank, by investor runs on USD Coin - the
second-largest stablecoin.
Ladies and gentlemen, as Bigtechs are further expanding into digital finance, there are
risks to our payment system, as well as to our monetary and financial stability,
especially from a potential issuance of their own currency. This is not mere speculation,
as evidenced by the decision of PayPal to launch its own dollar-denominated
stablecoin. PayPal has a user base 1,3 times bigger than the Eurozone's population -
therefore such a venture poses challenges at least under three areas:
a) Firstly, to the functioning of our payment system. Stablecoins are structured as
'closed-loop solutions' that restrict payments to users who adopt a particular payment
tool.
b) Secondly, if citizens prefer to use stablecoins issued by Bigtechs instead of money
issued by a central bank, then public money could ultimately lose its role as an anchor
that has been safeguarding for decades the convertibility of commercial bank deposits
or liquidity, into central bank money at par value. This is what actually happens without
realising it when we withdraw cash from an ATM: our sight deposits, that are a liability
for commercial banks are turned into a liability for the central bank, with cash being the
safest form of money and the reason why we trust the currency. In the absence of a
digital euro, we would risk losing central bank money as a visible symbol, linking the
various forms of private digital money to the State. This could undermine trust in the
euro area and ultimately in its monetary sovereignty.
c) Thirdly, there could be risks to the financial stability of the euro area, as Bigtechs
would not be concerned with avoiding disruptions to financial intermediation, or the
impact on the financial sector's liquidity, or ensuring a balanced compensation model
for all involved stakeholders, that is the intermediaries, acquirers and merchants.
Indeed, the examples of Bigtechs' increasing entry in digital finance are numerous.
Apple's new savings account, linked to its payment solutions, oers interest at more than
10 times the US average rate and has attracted more than 10 billion dollars in user
deposits since its launch in April 2023. Amazon oers buy-now-pay-later services to its
customers worldwide, while X (former Twitter) is reportedly planning to oer a full range
of payment and financial services.
In light of these developments, preserving financial stability is what the central banks
prudently do. Within this spirit, at the European Central Bank (ECB) we consider that
making our currency - the euro - available in the digital sphere, is necessary to address
the challenges brought by the digital revolution, in order to maintain the role of
sovereign money - a public good that central banks manage in the public interest - while
securing both innovation in payments and the financial sector's stability.
Yet, the digital euro can only act as a monetary actor, if it becomes a medium of
exchange, that is part of our daily lives. The intention of the ECB is to give consumers
the option to use the safest form of money, that is central bank money, in a digital
format, complementing existing euro banknotes and coins. The technology that would
support the design of the digital euro, is paramount for retaining its key characteristics
as a public good - in other words as a fully-edged currency, backed by strong trust,
which is the foundation of the European Economic and Monetary Union. The aim is to
make the digital euro inclusive, serving 347 million people in the euro area. It would be
free of charge and a truly European solution for day-to-day payments: online, in shops
or from person-to-person, with wide usability and accessibility from Finland to Greece
and from Portugal to Cyprus. It would offer high privacy levels and offline use.
Nowadays, no other means of payment offers all these characteristics at once.
Ultimately, trust in the digital euro will be the same as in cash, of equal value to the
cash euro, as it will be issued and guaranteed by the ECB and not at the level of the
member state, thereby distinguishing it from a typical bank deposit. In effect, the digital
euro would be a unique payment instrument, combining features of digital means of
payment with the most-valued characteristics of cash.
The digital euro would not be a threat to the role of banks as financial intermediaries.
The remuneration and quantity constraints per person, would stop the digital euro from
competing with banks for deposits. Besides, the design of the digital euro is for
providing a means of payment only - not a means of speculative value play as is the
case for the so-called crypto-assets- and banks could constitute an integral part of the
digital euro payment solution, through for example their front-end services. The central
bank will not interact directly with end-users.
If the ECB's Governing Council decides at the end of the process to introduce the digital
euro, following the completion of the preparatory and legislative phases, the digital
version of our currency will address some of the challenges brought about by the
technological revolution. It would contribute to Europe's strategic autonomy, by
providing payment service providers a platform for innovation, immediately scalable at
European level. The payment solutions currently available in many European countries
have not achieved a pan-European dimension, thus citizens cannot fully harness their
benefits. Unlike digital platforms and e-payment solutions such as PayPal, the digital
euro's platform would stimulate innovation from banks and spur competition amongst
them. In addition, a digital euro would allow banks to maintain their customer
relationships and handle digital euro payments and related services, while keeping the
responsibility for customer onboarding. In parallel, the digital euro would reduce
European dependence on the international card payment schemes, that currently
process outside the EU most of European retail payments. Moreover, since geopolitical
developments make us more vulnerable to power outages and cyberattacks, designing
the digital euro as a fall-back option such that it relies on infrastructure rails other to
those of non-European card-based payments, would enhance the resilience of the
European payment ecosystem.
The ECB has completed the consultation phase that was launched in October 2021 and
lasted two years. Based on the outcome of this phase, at the Governing Council of the
ECB we agreed to design the digital euro, such that it would be widely accessible to
citizens and businesses through distribution by supervised intermediaries. As from the
1st November 2023, at the Governing Council of the ECB we approved the launch of
the preparation phase, during which we will develop and test technical solutions and
business arrangements for our digital currency, as well as finalise the rulebook and
select providers that could develop a digital euro platform and infrastructure. The ECB's
project has benefited so far from the expertise of European policymakers, and the
rapport with market participants, civil society and the general public. The Eurosystem
will continue this journey with stakeholders and will adjust the digital euro design upon
finalisation of the legislative negotiations that are running in parallel.
Ladies and gentlemen, what I have briefly summarised is a very challenging and
ambitious project and objective. However, I am optimistic that it will ultimately bear fruits
and benefits, as our European track record has shown that what seems incredulous
now, is tomorrow's new norm.
Let me now turn to our domestic space and say a few words regarding the digital
initiatives that we undertook at the Central Bank of Cyprus.
In our commitment to advancing the digitalization of the financial sector and fostering an
effective financial ecosystem to bolster the economy, as well as to further encourage,
promote and support domestic financial innovation, at the Central Bank of Cyprus we
recently undertook two important initiatives:
The first one is the implementation of a remote electronic digital on-boarding platform
for our banking sector.
The digital on-boarding platform project is designed to expedite the process for
collecting, identifying and reviewing data of current or new bank clients. It will offer
incremental advantages to both individuals and corporations. The project is set to be
rolled out in three phases. Since the beginning of December, the Phase 1 of the
platform is ready to be provided to the interested banks by the successful tenderer.
Phase 1 involves the remote on-boarding platform for new customers and remote
updating of existing customer records via a digitalised process. Individuals, by using the
respective bank mobile or web applications, can submit the necessary information when
applying to a bank to become their customer or to update their bank account data,
without the need to go to the bank and with significantly less time involved. The
verification process of the submitted documents is primarily automated, saving a lot of
time in the process. The project is being executed according to the timetable, and
earlier this week a meeting was held at the Central Bank of Cyprus with the six banks
that initially committed to participate in our project, having a market share of more than
90%. At the meeting the next steps were agreed between the banks, the successful
tenderer and the Central Bank of Cyprus, to initiate the implementation phase. The
successful tenderer confirmed to all present that the solution is ready to be provided to
the interested banks, in order to implement the platform for each bank in the coming
months. Furthermore, meetings with the rest of the banks will be held this month, in
order to offer them the possibility to also participate.
Phase 2 will include connectivity and interoperability with utility service providers and
governmental services, facilitating the automated and rapid acquisition and verification
of specific customer data, such as proof of residential address, thus expediting further
the onboarding process and reducing the effort for bank customers to provide to banks
themselves the relevant KYC information that banks require in order to open an account
or in order to update an existing client's information.
Phase 3 will comprise digital information sharing between participating banks, for new
bank account opening or bank account switching, which in turn will reduce the need for
further engaging the customer in the process of account opening in other banks in
Cyprus. The aim is to reduce or even potentially eliminate duplications of submissions
of data by bank customers and thus make it easier for customers to apply to other
banks for accounts or products.
I would like to note that Phase 2 does not constitute a prerequisite for advancing to
Phase 3. In other words, we will proceed with the phase that is ready to implement the
earliest possible.
Secondly, the continued operation of our Innovation Hub, which this year has so far
interacted with 10 fintech entities, serves as a portal for an ongoing and constructive
dialogue on innovative products and services. The innovation hub is open to new firms
as well as incumbent institutions. It is also an important milestone that enables the CBC
to achieve its supervisory objectives and priorities relevant to digital operational
resilience and cybersecurity.
Let me now conclude.
Digitalisation is transforming society in ways that would have been difficult to conceive
only a few years ago, with profound effects expected in the near future on the way
banking and payment services are offered. Emphasizing transparency and efficiency is
crucial, while shaping an ecosystem where ease of use, transaction speed and
costeffectiveness are priorities.
At this significant turn of history, both the Central Bank of Cyprus and the ECB are
acting promptly and proactively, in order to ensure that that they are well poised to
embrace the future.