Pablo Hernández de Cos: Progress in the strategic agenda for a
digital euro
Speech by Mr Pablo Hernández de Cos, Governor of the Bank of Spain and Chair of the Basel
Committee on Banking Supervision, at the 2021 Annual Convention held by the Asociación de
Mercados Financieros, Madrid, 15 November 2021.
* * *
Dear Enrique, ladies and gentlemen,
I am honoured once again to be a guest speaker at this Convention annually held by the
Asociación de Mercados Financieros, whose great virtue is to gather together the authorities and
industry in a relaxed and agreeable setting. What is now a tradition is a source of great pleasure
for me and allows me to share with you some thoughts on matters I consider singularly topical
and important.
Last year I took the opportunity to speak mainly about the challenges the COVID-19 crisis posed
for the monetary policy of the European Central Bank (ECB) and our response to those
challenges. I further offered a preview of the content of the ECB's strategy review, which we
finally approved last July.
I also briefly referred to the Report on the Digital Euro that had just been published. The report
sets out the eminently theoretical bases on which the Eurosystem proposed anchoring an
orderly discussion on the potential issuance of a central bank digital currency in the euro area.
Today, I would like to revisit the subject and share some thoughts in light of the progress in this
area over the 13 months that have since gone by.
Digital transformation in Europe as the seed for the digital euro
At central banks both inside and outside the Eurosystem, we have for some time been
discussing and considering so-called central bank digital currencies. It is clear from a review of
these considerations that several reasons lie behind the introduction of a digital currency by
central banks.
The first arises, as in Sweden's case, from the need to preserve access by the population to a
safe and effective means for settling transactions. This is against a background in which cash is
ceasing to play this role because citizens use it increasingly less, replacing it with other private
digital payment alternatives.
Behind this rationale is acceptance of the fundamental role of central bank money as the only
type that ensures a specific nominal value, whereas confidence in private money derives
precisely from its convertibility into central bank money. This confers on central bank money the
role of a monetary anchor and, therefore, of the guarantor of price stability, financial stability and
the proper functioning of payment systems.
We must accept that progressively less use of cash as a means of payment, despite the fact
that banks continue to hold central bank money as reserves, might also end up affecting its role
as a unit of account and, ultimately, the effectiveness of central bank money as a monetary
anchor.
Against this backdrop, a digital currency would help preserve the role of central bank money as a
means of payment, complementing cash and, therefore, maintaining its function as a monetary
anchor.
This initial rationale is, obviously, closely related to a second one; namely, that relating to the
risks associated with the potential consolidation of a financial system excessively dependent on
completely private payment circuits. Dominant positions might arise in such circuits, and dilute
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the responsiveness to potentially severe operational incidents.
These risks are particularly significant in a setting in which Big Tech are expanding beyond their
traditional businesses to move into payment systems and financial intermediation in general. And
here, the economies of scale arising from the use of the crossed data these companies can
draw on foreshadow their rapid growth in these markets. This growth might even interact with the
development of what seek to be specifically private alternatives to central bank money (such as
the so-called stablecoins). And that might significantly and adversely affect competition, our
dependence on external technologies, financial stability and our monetary sovereignty.
A third type of rationale potentially underlying the issuance of a central bank digital currency
relates to financial inclusion. This may be very important in a good number of countries where
only a small percentage of the population has access to the most basic financial services, but
where digitalisation elements such as smart phones enjoy a much higher degree of penetration
among citizens. This is the case, among other countries, of China. There, the financial inclusion
rationale combines, moreover, with the authorities' concern about the appreciable fragmentation
of remote payments, the result of the strategy of the two Chinese tech giants which, so far, have
prevented their solutions from being mutually interoperable and have prevented new suppliers
emerging, creating a duopoly in the retail payment market.
Other reasons arise, as in the case of the United States, from the potential contribution of a
future digital dollar to allaying some slackening of the US electronic payments market, thereby
preserving the international role of the dollar in the face of the emergence of new
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competitors. Another is the potential for saving offered by the digital currency in terms of
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reducing the expenditure associated with printing physical money. Logistical reasons also
appear to lie behind other pioneering projects such as that of the Central Bank of Bahamas, an
archipelago of more than 700 islands frequently threatened by inclemencies of the weather that
make the distribution of cash a considerable challenge.
Some of the foregoing reasons are also clearly behind the Eurosystem's decision to explore
introducing a new form of central bank monetary liability which, like cash, would be available both
to households and firms. But unlike cash, it would be based on a digital as opposed to a physical
medium, i.e. a digital euro.
In Europe, however, one of the main reasons for the possible introduction of a digital euro
concerns the swift advance of digitalisation in our society and the growing commitment to boost
and harness this process.
This is, for example, the explicit rationale behind the European Commission's support to the
Eurosystem to move together to define a programme for the potential future launch of a digital
euro. The support originated with the call by President von der Leyen on the occasion of her
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speech on the State of the Union 2020 , in which she advocated accelerating digitalisation in the
European Union as a fundamental pillar for the modernisation and renewal of the European
economy. This idea has taken specific form in the Digital Strategy 2030, from which a detailed
agenda of regulatory and supervisory measures has sprung.
Among these measures, explicit stress is placed on the potential of emerging technologies as a
medium for the development of central bank digital currencies. From this standpoint, the digital
euro is conceived as an instrument to improve the efficiency of payment systems, to shore up
the international role of our currency and to make headway regarding the strategic autonomy of
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the EU.
In this respect, the work we have under way in the Eurosystem may be seen as one more of the
many public policy measures devised, at both the European and international level, to respond
appropriately to the many challenges posed by digital transformation.
A future digital euro would thus be part of a broader package of measures. It would include, for
example, advances in the regulation of the market for crypto-assets and their prudential
treatment, initiatives to reinforce cyber-security, and the design of a regulatory framework for
developments in artificial intelligence. Further aspects would be cloud computing and the design
of an appropriate governance framework for data processing.
All these advances, like the work on the digital euro, are, in sum, different parts of a single whole.
They call for a consistent and coordinated approach by different authorities and jurisdictions in
order to ensure that the transition to a new and more digital status quo is orderly and brings the
expected benefits to society as a whole.
Setting the work on the digital euro in context
Allow me now to briefly explain what the Eurosystem's work on the digital euro comprises.
As I said, the first landmark involved completing an eminently conceptual analysis which was
published in October 2020. This initial approach has helped to set the basic requirements a
digital euro should meet; to identify the scenarios that might justify its launch; to make a
preliminary assessment of the impact its issuance might have on the financial and monetary
system; and to look towards the different design options.
The second workstream we tackled in 2020 was a public consultation to learn of the opinions
and preferences of both users and industry. Ultimately, the success of any future digital euro will
hinge crucially on whether it is generally accepted in the habitual payment circuits. I should say
that the number of responses elicited by the consultation has been fairly indicative of the
significance society confers on this matter; indeed, it has been the most successful public
consultation in the history of the European system of central banks, with over 8,000
contributions. But in addition to confirming the interest the digital euro arouses, the exercise has
enabled us to verify that both consumers and firms set great store by privacy, security and the
possibility of readily making payments throughout the euro area. While this is only the first
contact to have been made, the information is very valuable and, naturally, it will be taken into
account when deciding on the configuration a future digital euro should adopt.
This is precisely where we now stand, after our July ECB Governing Council meeting approved
the launch of what under Eurosystem jargon is known as the "investigation phase" of a project to
issue a digital euro. Our objective for the next two years is to explore different options regarding
design and the distribution model. In this connection, one or several prototypes will be developed
and a deeper conceptual analysis will be conducted. More specifically, the aim is to define an
issuance, distribution and trading model for a digital euro that minimises its impact on the stability
and integrity of the monetary and financial system and which, at the same time, responds to
society's needs.
As you can imagine, it is a complex exercise that will involve fitting different pieces together. The
two-year term laid down no doubt speaks for itself as regards the scale of this challenge. So as
to have at hand a full view of the implications of the digital euro in all areas under the
Eurosystem's remit, a new structure within the Eurosystem has been created for its
development.
In parallel, we will continue working with the European Commission to analyse both the possible
need for regulatory adjustments and other aspects linked to the European digital strategy.
We will also step up our international collaboration in order to enhance our understanding of the
nature and opportunities sovereign digital currencies offer and to promote coordination with other
jurisdictions.
In addition, the success of any future digital euro will necessarily involve understanding the needs
of all stakeholders, including users and market representatives. To this end, an advisory group
has been set up comprising 30 members from the industry with recognised experience and
knowledge of the European retail payments market. This group will be the forum for fluid debate
between the Eurosystem and the finance industry on the design and distribution of a potential
digital euro.
The project also envisages the launch of communication channels with users - citizens and
businesses alike - so as to better know their needs and preferences and to thus be able to
design a digital euro that provides value to all parties.
The digital euro: challenges and opportunities
The aim of this roadmap is none other than to be ready to take a decision when the right time
comes. All we have so far decided, and I should stress this, is to prepare ourselves for launching
a digital euro if and when the situation so advises it.
The final decision on the future of the digital euro, including its specific design, will depend on the
outcome of these in-depth and carefully thought-out considerations as to its benefits and risks.
In this respect, one of the most commonly mentioned risks regarding the launch of a digital euro
is that it may cause significant disruption to a functioning and organised financial system that
already operates efficiently and does not therefore require significant changes.
It is worth recalling here, however, that the advances in digitalisation underlying the recent
impetus of central bank digital currencies are the same as those that are simultaneously blurring
the outlines of the rules that had hitherto prevailed in the finance industry. In fact, they are giving
rise to a break-up and decentralisation of the traditional value chain.
Here, an appropriately designed digital euro might actually be a timely counterweight to some of
these trends. As is the case with global stablecoins, such trends might swiftly and uncontrollably
change how money and credit are created in the economy.
A sovereign digital currency might prevent any future re-composition of the provision of financial
services from coming about in a disorderly and discriminatory fashion, creating potential
situations of market domination or excessive fragmentation that harms both key actors for
financial stability and end-users. In short, a smart digital euro could be conducive to healthy
competition both in the provision of payment services and in those of value added, keeping
consumers' options open.
By extension, the digital euro could be a unifying element in the European payments circuit,
structuring it around central bank money. This core role could also be extended beyond the area
of payments. By way of example, it could boost progress in other related areas such as the
creation of an integrated framework for the establishment and recognition of electronic ID, or
some standardisation of distributed ledger technologies.
Regarding DLT, let me stress that the relationship between technology and digital currency is
bidirectional. Admittedly, where technologies are better developed, headway in rolling out a digital
currency will be swifter. But where this is not the case, as in many euro area countries, a digital
euro might have a galvanising effect, boosting such technologies. Singapore is a case in point.
As part of its research agenda on sovereign digital currencies, Singapore last year constructed
an infrastructure prototype and a set of associated interfaces, capable of interconnecting
blockchain networks of different industries. It thus enabled business opportunities that had
hitherto been non-existent.6
There is a further potential opportunity linked to a future digital euro that I should mention. Given
the global weight of our currency both in trade and in international capital markets, a digital euro
could also play a key role in enhancing the efficiency, inclusivity, speed and transparency of
cross-border payments promoted by the G20. To achieve this goal, it is logically necessary to
strengthen cooperation with central banks from other jurisdictions for the sake of the
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interoperability in practice of digital currencies, accommodating our respective designs.
In sum, a well-designed digital currency could be a key part of larger-scale arrangements,
globally conceived to drive the adaptation of the European financial and payments system to the
needs of a changing digital environment. Aspects central to these arrangements - consumer
protection mechanisms, the safeguarding of privacy, the prevention of money laundering and the
fomenting of competition, among others - would be preserved.
That said, one of the core principles the Eurosystem shares with central banks from other
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jurisdictions is the need for the new digital currency not to be disruptive or to fall short of its
statutorily assigned objectives. In particular, the issuance of a digital currency must never
compromise either price stability or the stability of the financial and monetary system.
In this connection, we must acknowledge that the digital currency may potentially affect financial
intermediation significantly. It may replace the means of payment currently provided by the
financial sector, or even the deposits that banks now have in safekeeping. That might adversely
affect financial stability, particularly at times of crisis, when the appetite for holding deposits at the
central bank may increase significantly.
These negative effects might, moreover, be global in scale. This would be so if digital currencies
were accessible to non-residents and interoperable with the payment systems of other
currencies. Evidently, the use of a digital currency outside the issuing jurisdiction may raise
digital currency inter-substitutability risks (a risk that may be particularly acute for the emerging
countries), it may increase the international transmission of shocks and it may alter the
international role of different currencies.
These potential risks of a central bank digital currency are real and should be analysed prior to its
launch. Indeed, they may influence both the launch and, above all, its design.
In responding to these risks, a first option - and one that most countries appear to prefer - may
be an indirect distribution model, in which the central bank digital currency comes into citizens'
hands via supervised financial intermediaries. In other words, central banks would continue
providing safe money, while financial intermediaries would provide other services to citizens. The
digital euro would not be a competitor to the private sector; rather, the latter would play an
essential role in its introduction and functioning.
Second, to preserve financial stability, limits on the balances held in digital euro accounts may be
set and their remuneration above a certain threshold penalised. The challenge here is how to set
these limits so that financial stability is not endangered and, at the same time, that the primary
objective of digital currency issuance - that it should be an effective means of payment - is
fulfilled.
Third, extending these digital currency design characteristics to use by non-residents should be
analysed, to prevent the aforementioned potential international externalities. And, in any event,
international cooperation in the design of the digital euro will once again be pivotal: its potential
positive effects on international payments must be specified, but its risks to the global financial
system restricted.
Conclusions
Despite not having yet decided where we wish to go with the digital euro, our ongoing work in the
Eurosystem is undoubtedly necessary from a preparatory standpoint. And our work must be
sound should the circumstances advising its launch arise. We want to ensure that any future
launch of a digital euro does not adversely affect the financial and monetary system. To do this,
we must conduct a far-reaching and timely analysis that enables us to choose the most
appropriate design to respond to the scenarios that may lead to its launch.
At the same time, we must acknowledge that market developments move quickly and, therefore,
that the reality today will probably not be the same as that we will face in a few years' time. On
this basis, selecting the design and distribution model for the digital euro cannot be confined to
defining the functionalities that would enable it to be successfully integrated into the current
payments ecosystem. We must also think about those other complementary functionalities that
would smooth its transition to a future scenario. In short, we must be flexible, strategically
farsighted and ready to adapt quickly - but above all safely - to a changing environment. Set against
the deep-seated changes we are currently seeing in the provision of financial services, public
policy inaction is evidently a non-starter.
Thank you.
1
Armelius,H.; Guibourg, G.; Levin, A.T. and Söderberg, G. (2020): "The rationale for issuing e-krona in the digital
era", Sveriges Riksbank Economic Review, no. 2
2
Barinard, L. (2021): "Private Money and Central Bank Money as Payments Go Digital: an Update on CBDCs",
Speech delivered on the occasion of the Consensus by CoinDesk 2021 Conference on 24 May.
3
Over $1 billion for 2021, according to a recent report by the Board of Governors of the US Federal Reserve
System: www.federalreserve.gov/foia/files/2021currency.pdf
4
//ec.europa.eu/info/sites/default/files/state_of_the_union_es.pdf
5
"Retail Payments Strategy for the EU". Communication from the Commission to the European Parliament, the
Council, the European Economic and Social Committee and the Committee of the Regions:
eurlex.europa.eu/legal-content/ES/TXT/PDF/?uri=CELEX:52020DC0592&from=ES
6
See Monetary Authority of Singapore (2020): "Project Ubin Phase 5: Enabling Broad Ecosystem Opportunities",
July. www.mas.gov.sg/-/media/MAS/ProjectUbin/Project-Ubin-Phase-5-Enabling-Broad-Ecosystem-
Opportunities.pdf
7
BIS, IMF and World Bank (2021): "Central bank digital currencies for cross-border payments - Report to the
G20", July. www.bis.org/publ/othp38.pdf
8
See Bank of Canada, ECB, Bank of Japan, Sveriges Riksbank, Swiss National Bank, Bank of England, Federal
Reserve and BIS (2020), "Central Bank Digital Currencies: foundational principles and core features", October.
www.bis.org/publ/othp33.pdf.