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Pablo Hernández de Cos: Developing and providing a digital euro

Pablo Hernández de Cos: Developing and providing a digital euro

In a recent speech by Mr. Pablo Hernández de Cos, Governor of the Bank of Spain, at the 20th Anniversary Conference of the BIS Representative Office for the Americas, he spoke at length of the Eurosystem experience in developing and providing a digital euro.

Digital Euro

Developing and providing a digital euro

In a wide ranging speech that also covered the European experience in regulating cryptoassets, Mr.Hernández de Cos said, “One of the additional measures that could be adopted to respond to the challenges raised by financial innovation is the development of a retail Central Bank Digital Currency (CBDC).

In fact, a CBDC’s potential contribution to boosting the strategic autonomy of the European Union, by offering a fast and efficient alternative to other payment providers, is one of the key reasons why the Eurosystem is assessing the issuance of a digital euro.

But it is not the only one.

The role of the euro as monetary anchor is not only being put to the test by these new developments, but also, and probably more importantly, by the natural evolution of society.

The increasing digitalisation of every aspect of our daily lives is reducing the use of cash as a means of payment. Should it reach the point where cash is hardly used, the convertibility of central bank money and private money would be put at risk, affecting people’s confidence in the latter.

We believe that having a digital euro to ensure convertibility between these two types of money would underpin and protect the integrity of the euro as a unit of account.

A digital euro could also foster innovation, increase the efficiency of payments, and reduce our current reliance on non-European payment solutions and technologies.

I think the benefits of issuing digital central bank money for retail use are clear, but we cannot forget the other side of the coin.

CBDC Challenges

CBDCs come, indeed, with a number of challenges.

The technical or operational ones, such as setting up a whole new payment infrastructure, giving digital access to central bank money to every citizen and delving into the intricacies of retail payments are obvious difficulties to surmount.

However, what seems more challenging to me is being able to reach the delicate balance between achieving our policy objectives and, at the same time, avoiding collateral damage, to the transmission of monetary policy and particularly to the stability of the financial system.

It would probably be short-sighted to think that a CBDC would have no impact on the financial system.

Of course it may replace cash to some extent, but it is difficult to believe that it will not attract a fraction of deposits as well.

This means that a CBDC could have implications for financial stability, monetary policy, and the allocation of credit to the real economy.

However, dispensing with its issuance in order to preserve the status quo is not an option either.

We are in the middle of a whirlwind of change, so the question should not be “what should we do to avoid change?” but rather, “what should we do to ensure the stability of the financial system, in the midst of change?”.

That said, CBDCs may come in different shapes and forms; therefore, adequate design and implementation are needed in order to minimise their impact.

Digital Euro a major task

This is not a minor task and requires careful analysis.

There are many interlinked design options and they all have to be considered, both individually and holistically, in order to ensure they are a perfect fit.

This is, in fact, what the Eurosystem is currently doing in the context of the digital euro.

No decision has yet been made regarding its issuance or its final design, but we launched the investigation phase of the project last year in order to ensure we are prepared in the event that future developments warrant its launch.

Our work is now focused on deepening the conceptual analysis by assessing the different design options, as well as the distribution model.

The first step was to identify the use cases to focus on, namely those that better support the policy objectives of a digital euro and facilitate network effects.

Payments in e-commerce and physical stores, as well as person-to-person payments are, clearly, natural candidates.

They either represent important market segments or have a clear potential to grow, and they rely heavily either on cash or on non-European providers and technologies.

Payments between governments and individuals have also been considered a priority, given their potential synergies with the aforementioned ones.

In any case, focusing now on these payment segments does not mean ruling out others, but simply leaving them for future stages.

Next Steps

The next step of the analysis has covered what we consider to be the foundational design options.

They refer to the way a digital euro should be transferred, the level of privacy and the tools to control excessive use and, hence, limit its impact on the stability of the financial system.

As regards the transfer mechanism, we have decided to prioritise a digital euro solution in which transactions are transmitted online and validated by a third party, since this model covers the broadest set of use cases and supports the Eurosystem’s policy objectives.

Peer-to-peer validated offline payments are also going to be further explored, but this option presents a number of technical and regulatory challenges that make its time to market more uncertain.

Privacy is a design consideration that was rated high in importance by respondents to the public consultation we carried out at the end of 2020.1

In principle, a digital euro should provide the same level of privacy as current digital payment solutions in order to comply with the regulatory framework.

However, we are also exploring, together with the co-legislators, the possibility of attaining a higher degree of privacy in situations considered of low risk, such as online transactions for amounts below a certain threshold or offline payments, since they need to be carried out in close proximity.

Full anonymity, however, is not considered a viable option from a public policy perspective.

Complete visibility by the Eurosystem is not deemed desirable either, so it would be limited to what is strictly necessary to perform its tasks or is required by regulation.

Last, but not least, we have assessed different ways to ensure a digital euro is used as a means of payment rather than as a store of value.

Both holding limits and remuneration-based tools are considered effective means to limit the use of a digital euro as a form of investment.

However, no decision has been made yet on the precise way they should be combined or the parameters to use.

Rather, a more flexible approach has been agreed, ensuring that the design of the digital euro includes a wide set of tools, while leaving the decision on which ones to actually implement to a later stage.

These foundational design decisions, which were recently endorsed by the Governing Council, 2 are an important stepping stone but constitute only the tip of the iceberg of our analysis.

We have continued exploring design and distribution options and we are close to reaching a decision on the settlement model, the distribution model, the role of intermediaries and the basic principles that funding and defunding functionalities should observe.

Involving all relevant parties in these decisions is of utmost importance, and that is why we are actively engaging with a large number of stakeholders, not only from the industry but also end-users and European institutions.

Digital Euro Prototyope

Our analysis is not conceptual only.

We are also developing a prototype that will help us validate the different design decisions.

In order to do so, the Eurosystem is building the back-end infrastructure and we have requested the cooperation of the private sector to provide end-user interfaces.

An expression of interest was launched last April and five companies have been selected from a pool of 54 front-end providers.3 This will allow us to test end-to-end transactions for different use cases, both online and offline.

This prototype, which is expected to be completed in the first quarter of 2023, is only relevant for investigation purposes, and there is no plan to reuse it in a production environment.

We are now halfway through the investigation phase and our aim is to complete it by the end of next year.

Then, the Governing Council will decide whether to move into the implementation phase, in which technical solutions and business arrangements for a digital euro would actually be developed and tested with a view to their potential launch.”


The post Pablo Hernández de Cos: Developing and providing a digital euro appeared first on Payments Cards & Mobile.

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