burkhard balz : payment services at a crossroads speech by mr burkhard balz, member of the executive board of the deutsche bundesbank, at the 6th annual fintech and regulation conference afore consulting, virtual, 8 february 2022. * * * 1 payments ( r ) evolution ladies and gentlemen, some might think that there are huge “ walls ” dividing the worlds of fintech – or even broader – financial innovation and regulation. yet santiago calatrava, the renowned spanishswiss architect, preferred to build bridges rather than walls. therefore, i will take a closer look at the roads bridging these topics and also where they lead. for more than a decade now, we have been observing and increasingly using financial innovations. new entrants in the payment markets – bigtech and fintech firms alike – have started making the initiation of transactions faster and more intuitive, but without changing the fundamentals of payment processing. let me elaborate with a small example. whether payers use an e - commerce solution or their smart device at the point of sale, or they send money peer - to - peer to another person : the transfer of money takes place via familiar credit transfers, including instant ones, direct debits or card payment rails. what has dramatically changed, though, is the number and kind of actors involved. for example, if a consumer presents her smart phone at the point of sale, she could use her google pay app to initiate a payment. this may be funded by her paypal account which, in turn, is funded by a payment card. instead of just initiating a regular card transaction, two bigtech players, in this case, are added to the payment chain. such arrangements are becoming more and more popular and might be considered convenient by users, because they fit seamlessly into their day - to - day digital lives. but they add significantly to the complexity of payment processing. often, technical service providers, as they are known, such as firms providing the wallet app, are part of this payment chain, but they are not as firmly regulated as payment service providers or clearing and settlement mechanisms, for example. up till now, payments have been built around centralised hub - and - spoke models, like at card organisations or in clearing and settlement mechanisms. that means transactions flow via a central processing entity either directly to the payee ’ s account or after passing a number of additional processing entities, depending on the number of actors involved. basically,

the central organisation establishes trust among the participants that funds can be exchanged safely. but more than ten years ago, a new idea came onto the scene challenging the established model with a decentralised approach : distributed ledger technology. this allows crypto - assets or crypto - tokens to be transferred without a central organisation. instead, trust between the asset holder and the beneficiary is established via a cryptographic consensus mechanism. bitcoin was the first of these crypto - tokens and is the most prominent example. since it first emerged, a whole zoo of crypto - assets based on different consensus mechanisms and transfer protocols has been invented. there is a lot of creativity, it brilliance and entrepreneurial spirit. but there is also a kind of “ wild 1 / 5 bis central bankers'speeches west mentality ”, which is still a far cry from the initial idea of replacing traditional payment instruments. instead, crypto - token values fluctuate like blades of grass in a hurricane, inhibiting a wider uptake for payment purposes. consequently, stablecoins were introduced to address this. essentially, these are crypto - tokens that claim to be backed by fiat currency. prominent examples that already exist are usd coin and pax dollar. while payers and payees trust fiat money because central banks take responsibility for its stability, stablecoins merely borrow trust from the currency they are pegged to. yet, the substance of this pledge has so far neither been regulated nor put to the test. 2 different regulatory approaches nevertheless, tremendous progress has been made in payments overall. the market has been moving away from a fairly simple structure. there used to be a limited number of regulated participants domiciled within a certain area. now we are seeing a plethora of arrangements with a wide variety of different parties from all over the world, and developments are sometimes hard to keep track of. that is why i see “ payment services at a crossroads ”. and now, it ’ s time for regulators – not only in europe, but worldwide, too – to review the existing regulatory approaches in order to ensure the safety and efficiency of payments. this responsibility is also enshrined in the mandate of the bundesbank and of the other central banks around the world in their capacity as overseers. and it has led not only to a review and amendment of existing regulations and frameworks, but also to the development of new ones. in the following, i will set out