9/11/2020 On the future of money and payments I Deutsche Bundesbank

8 DEUTSCHE
y BUNDESBANK

EUROSYSTEM

On the future of money and payments

Panel statement at the Bundesbank virtual autumn conference "Banking and
Payments in the Digital World"

11.09.2020 I Frankfurt am Main I Jens Weidmann

> 1 Introduction

> 2 Opportunities and risks of central bank digital currencies
> 2.1 Opportunities of CBDC
> 2.2 Risks of CBDC

> 3 Alternatives to CBDC

> 4 Conclusion

1 Introduction

Ladies and gentlemen,

The history of money is a story of its gradual dematerialisation from tangible objects to intangible
computer code. For example, there once was a time, on the Pacific island of Yap, when huge and
heavy, often doughnut-shaped limestone discs were used as money. That is evidently a very
tangible form of money, as you can see in places like the Bundesbank's Money Museum where
such a Yap stone is on display. Digital money, by contrast, is intangible. It exists only as binary
code.

However, the stone money was a less impractical means of payment than you would imagine.
Moreover, the similarities with crypto tokens based on distributed ledger technology (DLT) are so
striking that some people wonder whether stone money might have inspired the invention of
Bitcoin.> [1]

One such similarity is that the creation of new stone discs was constrained. The limestone was

carved an the Palanan archinelann same ANN kilametres awaw and chinned ta Van_ This made ita

1. Fitzpatrick, S. (Seite) M. and S. (Seite) McKeon (2020), Banking on Stone Money: Ancient
Antecedents to Bitcoin, Economic Anthropology 2020, Vol. (Volume) 7, No 1, pp. (pages) 7-21.

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9/11/2020 On the future of money and payments I Deutsche Bundesbank
But the most striking similarity between stone money and crypto tokens is that both rely ona
public, community ledger system. On Yap, villagers knew and memorised the transactions - much
like a blockchain network. For this reason, it was not necessary to move the heavy stones.
According to reports by locals, one large stone was still accepted as money even though it had
fallen off a boat and sunk to the bottom of the ocean. So physical possession was not necessary,
either. And both systems provide transparency about transactions, as well as security, without
needing a centralised bank structure.

However, oral ledgers can quickly become overwhelmed if economic transactions are conducted
outside a Pacific atoll or become highly frequent. Digital ledgers, by contrast, facilitate global
transactions in large numbers. Of course, crypto tokens have shortcomings of their own. The high
volatility of their value, in particular, limits their use as a payment medium.

So, both stone money and crypto tokens touch upon two key issues in the payments debate:
First, how can consumers pay conveniently, safely and efficiently? And second, what role do we
want the central bank to play?

2 Opportunities and risks of central bank digital currencies

2.1 Opportunities of CBDC

Interestingly, DLT and crypto tokens were initially developed to circumvent the banking system
with the central bank at its core. It is therefore not without irony that their emergence was quickly
followed by talk about the possible issuance of central bank digital currency (CBDC). Facebook's
stablecoin initiative further fuelled this debate, as politicians are worried about Europe's financial
sovereignty in view of Libra and comparable endeavours.

And indeed, a large and growing number of central banks are busy researching the possible
effects of issuing CBDC. Digital central bank money for central bank counterparties, i.e. (that is)
banks, does already exist, and the discussion in this context revolves around whether it should be
provided via a new technology. Therefore, I will focus here on CBDC for the general public (

i.e. (that is) a retail variant).> [2]

Ultimately, whether central banks should introduce such a digital currency should be guided by
two questions: First, what central banks are looking to achieve by doing so. And second, whether
CBDC delivers on these goals without compromising other central bank objectives, like price
stability.

The design features of CBDC also depend on the goals: Is it about offering a real-time, cost-
efficient and convenient digital means of payment to accommodate the rising share of online
transactions? Or is it about granting the public access to the central bank's balance sheet digitally
instead of via cash? After all, cash is presently the only way for private individuals to hold central
bank money. All other types of money holdings are based on private money creation.

Important economic and technical choices would need to be made. Should CBDC be offered

1. Fitzpatrick, S. (Seite) M. and S. (Seite) McKeon (2020), Banking on Stone Money: Ancient
Antecedents to Bitcoin, Economic Anthropology 2020, Vol. (Volume) 7, No 1, pp. (pages) 7-21.

https://www.bundesbank.de/en/press/speeches/on-the-future-of-money-and-payments-843720 2/6

9/11/2020 On the future of money and payments I Deutsche Bundesbank
just some of the many unanswered questions.> [3] All these decisions depend on the purpose of
the new currency.

Several arguments have been put forward in favour of retail CBDC. In particular, it is often seen as
an alternative to commercial payment initiatives. There are concerns that international bigtech
companies could come to dominate the European markets for payment services, thereby gaining
stronger footholds in markets outside their own core domains. I expect that Markus Brunnermeier
will shed more light on the role of large platforms in this regard in his keynote speech later today.
> [4]

Above all, it is often thought that CBDC will make economic and financial transactions more
efficient and save costs. CBDC might, for example, make micropayments cheaper than they are
today. This could allow for new services and business models, like selling individual news articles
for a few cents rather than monthly newspaper subscriptions.> [5] Some experts believe that
CBDC could reduce frictions between payment systems and increase the speed of transactions
while ensuring their finality, for example by achieving delivery versus payment in securities
transactions.> [6]

It has also been argued that interest-bearing retail CBDC might boost monetary policy efficiency.

CBDC can provide the central bank with an additional instrument - the rate of interest it carries.>
[7] Some have even floated the idea of doing away with paper money altogether so that central

banks can lower interest rates to significantly less than zero without triggering a rush into cash.>
[8]

But let me be clear: central banks are not intending to abolish cash, and the Eurosystem is
strongly committed to the continuance of euro banknotes and coins. Many people value cash very
highly, and for legitimate reasons. It provides privacy, and its use does not necessarily depend on
technical infrastructure.

However, the share of cash is declining in many countries as cashless payments gain ground. Most
recently, the COVID-19 pandemic has given cashless payments an added boost - whether this
shift in payment habits will be permanent or goes even further, remains to be seen. Nevertheless,
the long-term trend is evident, and retail CBDC would allow the public to hold a digital claim on
the central bank that is as secure as cash. But due to regulatory and legal obligations, CBDC
would probably not be designed with the same degree of anonymity.

2.2 Risks of CBDC

Moreover, there are concerns about the changing roles of central banks and commercial banks. At
a fundamental level, the central bank could leave, as Hyun recently called it, "a much larger
footprint"> [9] on the financial system itself.

If customers were to switch large volumes of bank deposits into CBDC, it could drastically alter
the financial system. Kenneth Rogoff recently asked provocatively: "Who will make loans to

1. Fitzpatrick, S. (Seite) M. and S. (Seite) McKeon (2020), Banking on Stone Money: Ancient
Antecedents to Bitcoin, Economic Anthropology 2020, Vol. (Volume) 7, No 1, pp. (pages) 7-21.

https://www.bundesbank.de/en/press/speeches/on-the-future-of-money-and-payments-843720 3/6

9/11/2020 On the future of money and payments I Deutsche Bundesbank
To mitigate structural bank disintermediation, Ulrich Bindseil proposes a two-tier system.> [11]
Interest rates on CBDC could be significantly less favourable beyond a certain threshold. In his
opinion, this would discourage households from holding larger amounts of CBDC.

However, if a systemic banking crisis were to strike, even a high penalty interest rate would do
little to prevent a sudden shift in funds - a digital bank run, if you will. On the other hand, it could
be that banks will become more cautious, making a banking crisis less likely.

Indeed, CBDC might also be a catalyst for positive change in the banking system, stimulating
competition and promoting new services. Clearly, there would be a trade-off in designing a CBDC
that is attractive for consumers in order to reap its potential benefits, while curbing its risks and
potential side effects. For example, disincentives or constraints might lower the risk of a digital
bank run. On the other hand, they would also reduce the attractiveness of CBDC.

In any case, the introduction of CBDC needs careful consideration. Many issues surrounding CBDC
still require further analysis. The various risks suggest that a prudent design and cautious
approach would be essential.

Bundesbank staff across various business units are currently taking a closer look at the
opportunities and risks presented by CBDC and what they mean for its design features. It would
be wrong, however, to interpret this as a decision in favour of CBDC. We need a thorough
understanding - and we need to keep an open mind - before we can weigh the arguments and
draw any conclusions.

3 Alternatives to CBDC
Ladies and gentlemen,
Looking at the future of payments, consumers' preferences and needs should be front and centre.

The general public want quick, convenient, secure and cheap payment methods - including for
payments abroad. That, however, does not necessarily require CBDC.

Of course, market failures could justify a larger role of the state. But in a market economy,
offering innovative payment solutions to the public and interacting with customers should be a
primary task of the private sector. Central banks have to ensure that the payment system runs
smoothly and they can act as a catalyst.

This is why the Eurosystem is supporting the "European Payments Initiative" launched by a group

of 16 major euro area banks. This initiative is seeking to replace national schemes for cards, online
and mobile payments with a unified card and digital wallet that can be used across Europe.> [12]

Beyond that, digitalisation will leave more and more processes fully automated. Therefore,
incorporating a programmable payment medium would be practical and relevant for smart
contracts or machine-to-machine payments. To facilitate this idea, the Bundesbank and the
Federal Ministry of Finance are co-chairing a group comprising representatives from the two

1. Fitzpatrick, S. (Seite) M. and S. (Seite) McKeon (2020), Banking on Stone Money: Ancient
Antecedents to Bitcoin, Economic Anthropology 2020, Vol. (Volume) 7, No 1, pp. (pages) 7-21.

https://www.bundesbank.de/en/press/speeches/on-the-future-of-money-and-payments-843720 4/6

9/11/2020 On the future of money and payments I Deutsche Bundesbank
However, in the future, as today, recipients of large payments will prefer settlement in central
bank money since it harbours no risk of default. If we were able to build a bridge between private
blockchain networks and the existing payment infrastructure, DLT-based trade could be settled in
central bank money. Bundesbank payment experts are therefore investigating what is known as
the "trigger solution", a concept that would allow smart contracts to trigger conventional
TARGET2 transactions.

4 Conclusion

Ladies and gentlemen,

Developing innovative payment solutions like the one I mentioned needs a tech-friendly
environment. The recent decision to establish one of seven BIS Innovation Hubs as a Eurosystem
Hub in Paris and Frankfurt gives us the opportunity to advance innovative solutions for payment
services and market infrastructures in an atmosphere of curiosity and creativity.

As the host of the Frankfurt site, we look forward to working together with central bank experts
from all over the world to push ahead with digitalisation in the financial system.

Thank you for your attention.

Footnotes:

1. Fitzpatrick, S. (Seite) M. and S. (Seite) McKeon (2020), Banking on Stone Money: Ancient
Antecedents to Bitcoin, Economic Anthropology 2020, Vol. (Volume) 7, No 1, pp. (pages) 7-
21.

2. Barontini, C. and H. Holden (2019), Proceeding with caution - a survey on central bank digital
currency, BIS Paper, No 101; Boar, C., H. Holden and A. Wadsworth (2020), Impending arrival
-a sequel to the survey on central bank digital currency, BIS Paper, No 107.

3. Allen, S. (Seite) et al. (2020), Design Choices for Central Bank Digital Currency: Policy and
Technical Considerations, NBER Working Paper, No 27634; Auer, R., G. Cornelli and J. Frost
(2020), Rise of the central bank digital currencies: drivers, approaches and technologies, BIS
Working Paper, No 880; Kiff, J. et al. (2020), A Survey of Research on Retail Central Bank
Digital Currency, IMF Working Paper, No 20/104.

4. Brunnermeier, M. K., H. James and J.-P. Landau (2019), The Digitalization of Money, NBER
Working Papers, No 26300.

5. Bank of England (2020), Central Bank Digital Currency - Opportunities, challenges and design,
Discussion paper, March 2020.

6. FinTechRat beim Bundesministerium der Finanzen (2020), Der digitale, programmierbare Euro,
Stellungnahme 01/2020.

7. Bordo, M. D. and A. T. Levin (2019), Digital cash: principles & practical steps, NBER Working

Papers, No 25455.

1. Fitzpatrick, S. (Seite) M. and S. (Seite) McKeon (2020), Banking on Stone Money: Ancient

Antecedents to Bitcoin, Economic Anthropology 2020, Vol. (Volume) 7, No 1, pp. (pages) 7-21.

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9/11/2020 On the future of money and payments I Deutsche Bundesbank
unencumbering interest rate policy at the zero bound, paper presented at the Economic Policy
Symposium at Jackson Hole.

9. Shin, H. S. (Seite) (2020), Central banks and the new world of payments, speech on the
occasion of the Bank's Annual General Meeting, Basel, 30 June.

10. Rogoff, K. (2020), COVID Coin?, https://www.project-syndicate.org/commentary/covid1 9-
impact-on-rise-of-central-bank-digital-currency-by-kenneth-rogoff-2020-08
11. Bindseil, U. (2020), Tiered CBDC and the financial system, ECB Working Paper, No 2351.

12. European Central Bank (2020), ECB welcomes initiative to launch new European payment
solution, Press Release, 2 July 2020.

1. Fitzpatrick, S. (Seite) M. and S. (Seite) McKeon (2020), Banking on Stone Money: Ancient
Antecedents to Bitcoin, Economic Anthropology 2020, Vol. (Volume) 7, No 1, pp. (pages) 7-21.

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