Joachim Nagel: Introducing a digital euro - the cross-border
dimension
Speech by Dr Joachim Nagel, President of the Deutsche Bundesbank, at the RBI@90
High-Level Conference on "Central banking at crossroads", organised by the Reserve
Bank of India, New Delhi, 14 October 2024.
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1 Introduction
Dear Governor Das,
dear colleagues,
ladies and gentlemen,
I am delighted to be here with you today, at this wonderful location, visiting this
wonderful country - one of the cradles of world civilisation and culture.
The Reserve Bank of India is currently celebrating its foundation 90 years ago. My
heartfelt congratulations to all members of staff on this anniversary! Last year, Indian
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real-time payment systems processed about 129 billion digital transactions. This
means that 84% of electronic payment transactions took place in real time. During the
same period, only about 19% of electronic payments worldwide were real-time
transactions. In my view, this is impressive evidence of the excellent work the RBI has
accomplished over the last few years.
Payment systems and their cross-border interaction are also an important topic at this
conference. This is because cross-border payments are an integral part of our
globalised world. Historically, from the Renaissance to modern times, correspondent
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banks have acted as the bedrock for cross-border payment transactions. However,
even today, transferring funds by means of correspondent banking is often slow,
involves many steps and may result in high and non-transparent fees.
Moreover, in the last two decades, correspondent banking has been subject to a
downward trend, mainly due to increasingly strict compliance requirements. Between
2011 and 2022, the number of active correspondents decreased by roughly one third,
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while the value of cross-border payments increased by almost 40%. Obviously, this is
an alarming trend in terms of market competition.
To some extent, technical progress might be able to compensate for a tighter
correspondent banking market. In particular, in the last decade, a number of FinTech
companies have provided new opportunities to streamline cross-border payments using
innovative methods like blockchain and digital wallets. The FinTech revolution focused
on private money. However, it now appears there may be another revolution on the
horizon - this time involving payments in central bank money: the introduction of central
bank digital currencies (CBDC).
In my talk, I would like to address CBDC developments with a particular focus on
crossborder payments. First, I will outline some general points about the potential impact and
benefits of the introduction of CBDC for processing cross-border transactions. Second, I
will aim to highlight this topic in the context of the Eurosystem's work on a digital euro -
the envisaged European retail CBDC.
2 CBDCs and cross-border payments
Given that there are correspondent banks and FinTechs working on digital innovations
as well, let me begin with a question. What would be the additional benefits of CBDCs
in the area of digital payments? The introduction of CBDCs would facilitate a setup of
new infrastructures for digital payments. On the one hand, this makes high initial
investment necessary. On the other hand, once a CBDC is established with its new
infrastructure, it could catalyse broad improvements in payment systems, including
cross-border transactions - by introducing new message standards and shorter process
chains, for example.4
Starting on a green field may be one major advantage of CBDCs. Experience shows
that, in particular, implementing common standards is not an easy task. Take ISO
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20022, for example. The International Organisation for Standardisation proposed this
common standard for financial messages in cross-border payments in 2004. It will be
probably more widely used in payment systems on a global level next year - 21 years
after the initial proposal. This period feels even longer when you think of all the
innovations that have taken place in the meantime - the first iPhone was presented in
2007, the concept of a decentralised blockchain in 2008.
However, to be able to reap the benefits for cross-border payment, interoperability
between CBDCs must be ensured early on. To this end, central banks should already
begin to consider the best ways for interaction in the planning phase. In my view, we
have a historic opportunity to vastly improve cross-border transactions by making
different CBDCs interoperable from the very beginning.
Indeed, a number of projects are already researching the best ways of making CBDCs
interoperable. For instance, the Bank for International Settlement (BIS) Innovation Hub
in Singapore and a number of national central banks in the Indo-Pacific region set up
Project Dunbar to explore how a common platform for CBDCs could enable cheaper,
faster and safer cross-border payments.6
I am strongly in favour of a multilateral approach in this area, because this best serves
the interests of all participants. If central banks proceed in a largely unilateral way
instead, we not only risk inefficiencies, but also undesirable interferences. Consider a
scenario in which a CBDC is made available for holders abroad in a unilateral way. In
such a case, we could see currency substitution or appreciation pressure for the
domestic currency. Also, the balance sheet of the CBDC emitting central bank could
strongly expand. A knock-on effect may be that domestic monetary policy in countries
that suffer from increased currency substitution becomes less effective. By contrast, a
multilateral approach including reasonable holding limits could mitigate these risks.
Meanwhile, the RBI has made valuable contributions to the topic of retail CBDC. The
digital rupee based on blockchain technology was launched on 1 December 2022. It is
issued by the central bank and distributed by commercial banks. As I understand it, the
RBI intends to tap the potential for using CBDCs in cross-border payments as well.
3 A digital euro: The cross-border dimension
In the Eurosystem, we expect a digital euro to be launched in just a few years' time.
The primary goal of a digital euro is meet the domestic needs of the euro area. To some
extent, however, this goal already includes a significant cross-border dimension. Let me
explain what I mean by that. A quarter century on from the introduction of the euro,
there is still no single pan-European solution for digital payments when people go
shopping in stores or online. This means there is a risk that traditional cashless
payment solutions offered by private European payment service providers will not
match customer needs.
To be fair, some euro area Member States have successfully implemented innovative
digital solutions in the area of payments - I am thinking, for example, of the online
payment system iDEAL in the Netherlands or Bizum Wallet in Spain. However, such
payment solutions by themselves usually only function within national borders.
Promising initiatives have been underway in recent years to widen the scope of these
solutions. For example, iDEAL was successfully acquired by the European Payments
Initiative, a company founded by several European banks and financial services
companies. This initiative seeks to create a truly pan-European payment solution in the
near to medium term.
This shows that the European payments sector has made meaningful progress;
however, there are challenges further ahead. International payment providers,
particularly those offering credit card schemes, still heavily dominate the European
market for payment services - and even more when it comes to payments abroad.
A digital euro would be a major step forward in this context. It would provide a
standardised digital means of payment for day-to-day transactions throughout the euro
area. Despite the need for a more integrated payment system, we are determined to
prevent the Eurosystem's footprint in the European financial system from becoming too
large. We are therefore planning to issue a digital euro, but not to distribute it. This
means that banks and other payment providers should assume the role of the CBDC
interface between the Eurosystem and the customers.
The euro area currently consists of 20 Member States, each of which has its own
banking system with its own unique features. Against this background, I am sure you
can imagine the overall complexity of our task. Therefore, our current focus is on
making the digital euro accessible for all users within the euro area. We are investing
great effort in our work on this, and we are constantly explaining what we do and why
we do it, not least because a number of people are sceptical of CBDCs.
Once we have accomplished a digital euro for all users within the euro area, it will, in
my view, be worth considering making it accessible to users outside the euro area as
well. Rules for geographical access to a digital euro will be set down in legislation. If
European legislation allows, access to a digital euro can also be granted to consumers
and firms in the Member States of the European Economic Area outside the euro area.
Selected non-EU countries can be included as well.7
Ideally, the D€ would be interoperable with other CBDCs from the very start, for
example, for person-to-person payments or commercial payments from or to firms
outside the euro area. However, this is currently a vision for the future, since, as already
mentioned, we first have to overcome numerous challenges to establish a retail digital
euro that works within the euro area.
4 Concluding remarks
Let me conclude. So far, CBDCs are newcomers to the world of payment systems. We
can only estimate how large a role they will end up playing in payment transactions.
This is all the more true when it comes to cross-border payments.
The scepticism about CBDCs in many quarters is not uncommon for many
technological innovations. For example, in the early 1980s, "computerphobia" was a
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widespread phenomenon. This took a wide range of forms, even fear of physically
touching a computer or feeling threatened by those who worked with them. Today, this
may seem very strange to us. Computers have since become an essential day-to-day
tool for us.
And so we will continue our efforts to implement CBDCs. I am confident that this will
ultimately make our payment systems better, faster and more efficient.
1
ACI Worldwide Inc., It's prime time for real-time: Real-time payments adoption and
growth around the globe , Payment report 2024.
2
Lothian, J. R. (2002), The internationalization of money and finance and the
globalization of financial markets, Journal of International Money and Finance 21, Vol.
6, p. 699-724.
3
Garratt, R., Wilkens, P. K. and H. S. Shin, Next generation correspondent banking ,
BIS Bulletin No. 78, 30 May 2024.
4
Deutsche Bundesbank, Cross-border interoperability of central bank digital currency ,
Monthly Report, July 2022, p. 59-75.
5
ISO 20022 | ISO20022
6
Project Dunbar - International settlements using multi-CBDCs (mas.gov.sg)
International aspects of CBDCs: update on digital euro (europa.eu)
8
LaFrance, A., When People Feared Computers, The Atlantic, 30 March 2015.