Burkhard Balz: Central Bank Digital Currencies - The acceptance
and adoption challenge
Keynote speech (virtual) by Mr Burkhard Balz, Member of the Executive Board of the Deutsche
Bundesbank, at the virtual European Payments Conference, "Key Trends in the European
Payments Landscape", 4 May 2022.
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1 Introduction
Ladies and gentlemen,
Thank you for your warm welcome and thank you for giving me the opportunity to deliver the
keynote speech for the panel on Central Bank Digital Currencies (CBDC) at this year's European
Payments Conference.
I can remember quite vividly last year's European Payments Conference. It was a time of positive
outlooks.
Almost one year later at this year's conference, I am again speaking to you in a virtual, digital
format. At the same time with the ongoing Russian war on Ukraine, the geopolitical as well as
economic prospects have radically changed and worsened compared to last year.
We have come together today, however, to discuss trends in European payments, with regard to
CBDC and a digital euro in particular. At least in this field we see some rather positive prospects:
A potential digital euro would offer a huge array of opportunities. And, whilst it also comes with
considerable challenges for central banks as well as the financial industry, there are promising
avenues which could be pursued in order to mitigate the associated risks. In my speech, I will
shed some light on the challenges ahead and lay the groundwork for the subsequent panel
discussion.
2 CBDC initiatives worldwide
Central banks worldwide are evaluating the opportunities and challenges associated with the
introduction of a central bank digital currency. The status of the initiatives on CBDC varies,
however:
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Few countries have already launched a CBDC, with the Nigerian e-Naira as the latest example.
Other central banks are in the pilot stage and preparing a possible full launch. The Chinese
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eCNY (e-Yuan) certainly is the most prominent example here. With the aim of strengthening the
position of the CNY in a digital future as well as making electronic payments more resilient, China
most recently carried out field tests during the Olympic Winter Games in Beijing. By the end of
2021, 140 million respective digital wallets had already been issued according to People's Bank
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of China representatives, although it remains unclear, how many of these are used regularly. By
integrating the e-Yuan as a payment option into WeChat - the dominating digital payment service
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in China - adoption is likely to rise however.
Another motive for considering CBDC is possible efficiency gains in cross-border payments.
Project Dunbar, a partnership between Australia, South Africa, Singapore, Malaysia and
the BIS Innovation Hub, aims to explore the challenges and benefits of a common settlement
platform for cross-border payments between multiple central banks using digital currencies.
Similarly, the "mCBDC Bridge" project aims to improve cross-border payments by looking into
the potential of common interoperable platforms for multiple CBDCs. Project partners from Hong
Kong, Thailand, China, United Arab Emirates and the BIS Innovation Hub have already
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successfully set up a respective prototype platform.
To give you one last example, the United States is less advanced in its considerations, but
seems to be picking up speed. In March, President Biden signed an executive order to assess
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the risks and benefits of creating a CBDC, as well as other digital asset related topics.
3 Challenges and opportunities associated with CBDC
Let us take a closer look at the potential challenges and opportunities of a central bank digital
currency: CBDC would be a third form of central bank money alongside cash and bank reserves.
If well designed, CBDCs could combine the improved efficiency provided by modern, digital
processes in payments with the safety provided by a central bank in a single means of payment.
Consequently, we see various possible benefits of CBDC, if well designed:
A CBDC could offer access to a safe, instant and efficient digital means of payment for all
population groups, including less digitally savvy groups of society. It would also be beneficial
if CBDC could support offline payments.
People would benefit from a digital and cost-effective cash alternative to choose from.
And CBDC could facilitate the emergence of a new digital eco system with full
panEuropean reach and the availability of new services, resulting in possible productivity gains,
for instance by providing digital money that could be used in programmable environments.
More precisely, a CBDC could be suitable for completely new use cases in the "Internet of
Things". Depending on the design of a CBDC, private actors could offer completely automated
payments based on smart contracts. For example, electric car charging could be paid for
immediately and without further intervention by the driver. This calls for new forms of
collaboration: Recently, JP Morgan announced a partnership with Siemens, bringing payments
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and products closer together.
However, if a CBDC were to be made available to the public as a complement to cash, we would
have to think the consequences through very carefully. There are various challenges to be
addressed and I will name some of the key aspects:
Central banks and supervisors have to address the associated risks to financial stability and
monetary policy. One important aspect to consider is the role that banks and other payment
service providers play as intermediaries in the financial system. When discussing different
design options for a CBDC, the effects on the balance sheets of commercial banks as well as
the central banks need our full attention. An outflow of deposits from the banking sector must be
avoided, as well as sudden, uncontrolled shifts of bank deposits to central banks' balance
sheets. Possible countermeasures could be, for example, maximum amounts or graduated
interest rates, which could also result in negative interest rates above a certain level. But it
should also be taken into account that acceptance of a CBDC could suffer if parameters were
set without keeping an eye on the user experience.
A CBDC expecting to gain widespread adoption has to be sufficiently scalable and secure.
Cybersecurity risks are one key aspect in this context.
In order to ensure broad acceptance, we will have to make a CBDC accessible to all groups of
society, without barriers, but in a secure way.
In this respect, central banks face a balancing act between two opposite key risks: first, being too
ambitious could lead to a crowding out of private payment solutions and a potential
disintermediation of the banking sector. Second, creating an unattractive product would result in
non-acceptance by consumers and enterprises. Therefore, central banks aim to strike the
balance: the level of adoption of a CBDC should neither be too high nor too low - an "acceptance
and adoption challenge".
Lastly, the effective prevention of money laundering and terrorist financing is on our list of
challenges ahead.
In the digital euro project, the Eurosystem is moving forward swiftly but thoroughly to address
these challenges.
4 The digital euro project
In July 2021, the ECB Governing Council decided to set up a formal project on a digital euro. In
the Eurosystem, projects generally start with an "investigation phase". Experts from the ECB and
the national central banks have been working together since October 2021 in an investigation
phase that will last 24 months.
At this stage, the focus lies on aspects such as:
possible use cases involving consumers, businesses, as well as potentially the government
and machines (the aforementioned car payments are only one example);
functionalities and design choices;
technical infrastructures; here earlier technical experiments already have demonstrated that
from a technical perspective there would be no hurdles both for account-based and
tokenbased systems;
but also interdependencies with the market and the business options for intermediaries.
In addition, the legal basis for a possible introduction is to be determined.
Moreover, the project elaborates on ways to ensure high standards of cyber security and
operational resilience: better safe than sorry.
Coming back to the "adoption and acceptance challenge" mentioned earlier: we seek not too
much, but also not too little adoption. Market acceptance is key to achieving our objectives and
can only be achieved if a digital euro serves the needs of the users. Therefore, the Eurosystem
is interacting with all the relevant stakeholders. These include, of course, banks and other
payment service providers as well as consumers, merchants, other enterprises and authorities.
We will pay particular attention to ensuring access to a digital euro for all citizens. A smartphone
wallet is one option. However, we will also consider other means of access, since the euro
should also be usable for less digitally savvy groups of the population - even if it is certain that a
digital euro would not replace euro banknotes and coins, but only supplement them.
And of course, when discussing future payments, we must also take into account the needs of
the industry - keyword "industry 4.0" - as well as the financial market, for example with regard to
the so-called "token economy".
Cooperation with the private sector will be key to ensuring acceptance and wide use. To achieve
this, we are also working to make it available within private payment solutions. In my opinion,
relying on the private sector and its strong position and broad experience concerning the
customer interface makes sense here.
For instance, the Eurosystem has set up a Market Advisory Group. This group of professionals
from the retail payments market provides advice on the possible design and distribution of a
digital euro. The digital euro is also a priority topic for the exchange between central banks and
the market within the Euro Retail Payments Board.
At the national level, too, we have set up a regular exchange, for example within the framework of
our Payments Forum, which consists of representatives from both the supplier side and the
demand side of the payments market.
Also worth mentioning is market research with the help of focus groups, which aims to gain a
better understanding of the user perspective. The findings of these focus groups have recently
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been published, giving additional insights into the payment needs of users of a potential digital
euro: most importantly, participants preferred payment methods with a pan-European reach, high
convenience and universal acceptance in physical shops and online. In addition, and confirming
the findings from the public consultation, privacy protection is of high importance.
In this respect, we see the digital euro as an opportunity to maintain trust in payments in the
digital era. In light of the increasing monetisation of payment transaction data by private
corporations, people expect payments with high privacy standards. Especially in Germany,
responses in a public consultation on a digital euro had showed, that individuals pay particular
attention to this aspect.
Therefore, a digital euro would have to offer the highest privacy and data security standards
possible, while still complying with the necessary regulation regarding anti-money-laundering and
the financing of terrorism.
In addition, the supportive announcement made by the European Council of Finance Ministers on
25 February 2022 has once again highlighted how much a digital euro is also seen as a political
project.
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Meanwhile, the European Commission just recently carried out a targeted consultation, based
on which a legislative proposal is to be submitted by the beginning of 2023.
So what is next for the Eurosystem digital euro project? We will proceed investigating in order to
be able to take a decision on a realisation phase at the end of 2023. This realisation phase could
take three years and would include the development and testing of technical solutions and
business arrangements necessary for actually issuing a digital euro.
5 Conclusion
Let me conclude,
To make the digital euro a success and to win the aforementioned acceptance and adoption
challenge, the user needs are key: if we want the digital euro to be broadly used and accepted, it
will have to be convenient, available for all relevant use cases, as well as safe and efficient. Let
me emphasise once more that the private sector should play an important role here.
Finally, the European dimension is key: in order to be successful, the introduction of a digital euro
needs to be a common European project, supported by the European public as well as the
legislator.
With the digital euro project, we as central banks want to do our part to move forward at the
European level and to bring one of the main symbols of our united Europe - the euro as our
common currency - into a digital future.
Since I served as a member of the European Parliament for almost ten years, I know that
collaborating and trying to find solutions in a European context is no "walk in the park". But recent
developments have clearly illustrated that our future can only lie in a strong, integrated and
aligned Europe. As Robert Schuman already said in 1950: "Europe will not be made all at once,
or according to a single plan. It will be built through concrete achievements [...]." Although a great
deal has been accomplished in the past 70 years, European integration should continue with
further concrete achievements and a digital euro would be such an achievement.
Thank you very much.
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1. Atlantic Council CBDC Tracker: www.atlanticcouncil.org/cbdctracker/
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2. See e.g. PBoC (2021): Progress of Research&Development of E-CNY in China:
www.pbc.gov.cn/en/3688110/3688172/4157443/4293696/2021071614584691871.pdf
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3. See e.g. The Register: www.theregister.com/2021/11/05/digital_yuan_140m_wallets/
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4. See e.g. t3n.de/news/wechat-china-digitaler-yuan-kryptowaehrung-nft-1464906/
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5. See e.g. BIS: www.bis.org/about/bisih/topics/cbdc/mcbdc_bridge.htm
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6. Executive Order on Ensuring Responsible Development of Digital Assets | The White House
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7. See www.dertreasurer.de/news/cash-management-zahlungsverkehr/siemens-und-jp-morgan-wollen-
treasury-automatisieren-2022381/
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8. ECB press release from 30 March 2022:
www.ecb.europa.eu/press/pr/date/2022/html/ecb.pr220330~309dbc7098.en.html
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9. ec.europa.eu/info/consultations/finance-2022-digital-euro_en