What is the German banking industry committee’s position on the digital euro?

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Digital euro as a complement to traditional cash

Hello Mr. Holeczek, the ECB’s current plans see the digital euro as a complement to traditional cash. What is the motivation behind this and does the digital euro have the potential to revolutionize the financial sector?

As far as motivation is concerned, I cannot speak for the ECB, of course. According to the publications, the main drivers are digitalization and the decline of physical cash. But the emergence of cryptocoins and stablecoins certainly plays a role as well, as they could threaten monetary sovereignty and thus the sovereignty and stability of economies.

The aim is therefore to give all citizens access to central bank money in the digital future as well, i.e. for them to have a claim against the ECB, as they have with cash. This should strengthen the role of the euro as one of the main currencies in the world. Whether the digital euro will revolutionize the financial sector or “disintermediate” it with considerable damage to the economy ultimately depends on how the digital euro is set up by the ECB.

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Retail CBDC and wholesale CBDC

The German Banking Industry Committee (GBIC) is clearly in favor of introducing a wholesale CBDC and tokenized commercial bank money in addition to a retail CBDC. Can you briefly define these different forms for us?

We talk about our currency, i.e. the euro, as if it were exactly one form of money. Many people are not aware of it, but the euro already consists of three forms even today. There is the euro as cash, the euro that people hold in their accounts and the euro that banks hold in accounts at the central bank. In the end, a euro is always worth a euro, since there is always a claim for exchange – for citizens, for example, by means of a withdrawal in euro cash, which is a claim against the central bank.

If the ECB introduces a digital euro, it will just be another form of money. As a supplement to cash, this form should then also have comparable properties to cash, i.e., for example, anonymity and also functionality in the event of crises such as natural disasters.

However, such a digital euro cannot cover the needs of manufacturers, for example. The industry do not need anonymous money, but money that supports new technologies like blockchain/DLT. Like today’s bank deposit, this can also represent a claim against a bank – we call this “Giralgeldtoken” or tokenized commercial bank money. And since these technologies are also interesting for banks, e.g. in capital market business, it makes sense to make today’s bank balances at central banks “blockchain-ready”. That would be the wholesale CBDC.

At the end of the day, the aim is to make all three of today’s forms of money (cash, bank balances, banks’ balances at the central bank) available in digital form, always bearing the target groups and benefits in mind.

What will change for end customers when a retail CBDC is introduced and what would be the added value of such a solution?

That’s a very good question. Ultimately, it depends on how the ECB will issue the retail CBDC. All sorts of variations are being discussed at the moment. An account-based digital euro, for example, would have nothing to do with the new technology of the token economy, would probably be similar in handling to today’s bank deposits (two factors in the payment process, etc.), and would not be anonymous.

Thus, the added value would be next to nothing – except that I could demand repayment from the ECB rather than from my bank. But then again, deposits at banks are also safe thanks to deposit or protection. At cooperative banks (Volksbanken and Raiffeisenbanken), the systems are even designed to protect not only the individual savers, but the entire institution if required.

However, if the ECB were to issue the digital euro in such a way that it could be used anonymously and offline, then I would have digital money and could still surprise my wife with a bunch of flowers when doing the shopping. The digital euro would also work remotely, meaning I could send my children their pocket money from smartphone to smartphone without being in the same place. In this respect, the added value depends on what features and ultimately what technology the ECB will opt for.

Digital euro: Role and risks of banks with the retail CBDC

In your position paper of June 25, 2021, you clearly advocate a cap on the maximum amount for a retail CBDC to ensure financial stability. Where exactly do you see the risks of a CBDC as a cash alternative?

If a retail CBDC is to bring added value to citizens, it must be anonymous, because so far there is no anonymous secure and digital money, where nobody could have a view on my deposit or my transactions. That would be a real USP, i.e. an added value that no other form of money offers. This also goes well with resilience in a crisis. Even without electricity or Internet connection – think of the terrible floods we had in Germany last year or of hiking trips in the Alps – there must be a way to pay digital.

However, when money is usable offline and especially when transactions are anonymous, we need to prevent money laundering. In this respect, genuine added values are in a conflict that only a limit can solve. After all, at some point, a todays physical wallet is full, too.

Another important factor is a situation of a crisis: when there is a crisis, whether it is a crisis of confidence, a natural disaster or the terrible situation in Eastern Europe at the moment, people increasingly fall back on cash. In the case of physical cash, there are stop mechanisms through supervisory regulations (e.g. withdrawal bans) and also at a technical level (empty ATM). Especially in a crisis, both companies and consumers usually need more liquidity in the form of loans.

If, within seconds, too much money were to be made available with a digital euro, we would further tighten liquidity of the commercial banks and same time available loans and exacerbate the crisis. This, however, must not happen under any circumstances, otherwise we will additionally jeopardize our monetary and economic stability in the crisis.

The GBIC is also in favor of retaining the intermediary function of banks even after a digital euro has been introduced. Where exactly do you see the role of banks in dealing with a retail CBDC?

Here, too, much depends on how the ECB is going to design its features. Banks could provide the wallets, make withdrawals and deposits from the account into the wallet, i.e. provide the digital ATM in the smartphone or the virtual cash registers and cash logistics for retailers and businesses. In other words, they could take over the customer contact that the ECB is not cut out for.

What must be avoided in my opinion is for banks and other supervised marketplayers to run the infrastructure, ensure identification and money transfer (e.g. for an account-based digital euro), bear all the costs and do all the work without having any benefit from it. This would be a deep and very one-sided intervention in the market and more akin to a planned economy structure than to the nature of our social and, these days, also ecological market economy.

Advantages of a separate wholesale CBDC

For interbank trading, the GBIC advocates the creation of a separate wholesale CBDC. Can you briefly explain what the advantages are over existing systems and why the retail CBDC cannot be used for this purpose?

Among other things, securities settlement and custody are already possible on blockchain/DLT infrastructures. Instead of a certificate, the security is represented by a cryptographic key in this case.

Now, it’s certainly possible to create a purely digital and token-based securities register, but it makes little sense. Rather, securities should be traded directly on the blockchain. And since it can be assumed that a security is rarely exchanged for another, the question arises: where is the money in the form of a token that can be exchanged directly for the security?

In technology, this process is also called delivery versus payment, or DvP for short. So there is a need for unlimited amounts of secure money from a universally recognized and reliable issuer on the blockchain. This is the role that the ECB should play. However, due to the amounts called, the money should not be anonymous. Neither does it have to work offline, as the security is also only available online. This contradicts the key characteristics of a retail CBDC.

At the end of the day, both are tokens issued by the ECB, but they are two technologically different approaches to ensuring the functionalities that are required. Thus, a retail CBDC with the characteristics of cash is not suitable. The ECB can, of course, also issue the retail CBDC on a blockchain. But then the question arises as to what the added value for citizens would be. Because at least the offline usability would then be ensured only for a short time or not at all. Transferred to today’s world, this is roughly similar to the question of why banks don’t use cash for business transactions among themselves. It’s simply not made for this purpose.

CBDC in context of Internet of Things

An entirely new application area that the GBIC is talking about in the context of a CBDC is programmability or usability in the context of the Internet of Things (IoT). Can you briefly explain how this can work and what the role of the ECB, the banks and, if applicable, other (private sector) players is in this area?

We need to be a little careful here. There is a lot of talk about the programmability of money. We strictly reject this. Money must be universally usable and should not be given inherent characteristics such as permanent use restrictions. But of course, figuratively speaking, I need to be able to put the money in an envelope that says: open only when a certain condition is met. This is not programmable money, but programmable payment initiation done by smart contracts. That is a very significant difference.

And when it’s possible to use the digital euro digitally, then it should also be possible to program the transfer. I would consider it an added value if, for example, my children automatically received their pocket money every week, provided that the contents of my digital wallet were still sufficient.

In our opinion, there will be many use cases for this automatic money transfer in the future, also in the IoT environment. Incidentally, this applies not only to retail CBDC but to all three new forms of money – to tokenized commercial bank money as much as to wholesale CBDC.

It’s the role of the bank that differs. In one case, we may be a solution provider if we are responsible for the digital wallet (retail CBDC), in another, we may be the issuer of the money (tokenized bank money) or even users ourselves as in the case of wholesale CBDC.

Does tokenized commercial bank money have the potential to change value creation in banking, and if so, to what extent?

Tokenized commercial bank money aims to keep today’s bank balance on the balance sheet, thus preserving the financial sector’s essential contribution to economic and monetary stability, while making the money available in a new form – i.e. as a token and thus blockchain-ready. There will be changes, in my opinion, as this money has to live on the different blockchains of the economic players. Nevertheless, there needs to be a connection to the bank so that it can continue to be a deposit and thus the basis for loans.

I think the connection between our technology and the technology of the economic players is new and an additional effort. On the plus side, however, the transfer of money takes place directly in the economy’s systems. At the end of the day, this will probably shift value creation in both directions. Whether this will eventually cancel itself out I’m not yet in a position to judge.

Final question: do you believe in the introduction of the digital euro and when do you think it will come?

As far as retail CBDC is concerned, I think the ECB will decide in 1.5 years that the digital euro will come into being. Given a three- to five-year phase-in period, it would probably arrive by 2026 to 2028. However, how quickly it is then going to spread will also depend on whether or not users see added value in it. . I don’t dare make a forecast today.

I’m sure that the digital euro of the banking industry, i.e. tokenized commercial bank money, will come as soon as the economy needs tokenized money on its DLT-based systems; whether uniformly as a token or rather as a stablecoin depends on how fast the economy develops, because an European wide accepted, uniform token for commercial bank money takes a little more time than a stablecoin of single financial istitutes or a Bank networks.

We anticipate a demand before 2026, and the banking industry, specially the German cooperative Banks will address this demand. However, it should not be forgotten that we already offer solutions today in which smart contracts can independently execute payments even today, which means that banks have made more progress in the area of payments than they are sometimes given credit for.

Thank you very much for this interview.