 Welcome to the ECB podcast bringing you insights into the world of economics and central banking. My name is Michael Steen and in today's episode we'll talk about a digital euro. In the last two episodes we've talked about the impact of digitalisation on jobs and how it transforms the way we work. But it's not just that digitalisation has spread to every corner of our lives. It affects how we live, how we consume and interact with each other. It also affects how we pay. More and more people are paying with cards, phones, watches, rings and there's some evidence that the coronavirus pandemic has accelerated contactless payment means and other forms of paying. Now currently when you pay like that you're interacting with money in your bank account or on your credit card. But what if you could have the digital equivalent of a banknote or coin? Earlier this month the ECB released a report on exactly this question the possibility of a central bank digital currency, the digital euro. With me here today is Ulrich Binzal who's responsible for market infrastructures and payments here at the ECB. Thanks a lot for joining us Ulrich. Thanks Michael for inviting me. Ulrich you were part of this high level task force with representatives from national central banks from across the euro area who wrote the report. But before we get into the detail on that I think it's probably important to touch very briefly again on this big topic of what is money. And here I think it's important that we talk about two particular classifications and that is central bank money which is currently essentially banknotes as far as most people are concerned right. The only way you or I really touch so-called central bank money is if we have a banknote and then everything else which is commercial money and that's basically all the money on our bank accounts whenever we make a payment electronically at the moment. And that also is effectively issued by the bank where our account is. Can you just talk us through those differences and what the difference between those two categories is? Yeah sure Michael. If we look today at how we use the two forms of money we can again distinguish the three functions of money. So unit of account as mentioned comes from the central bank. As a store of value we can observe that a commercial bank money really dominates. So 90% of total money is commercial bank money. The stocks of banknotes are much lower around 10% of what we hold with our commercial banks as a side deposit in particular. So overwhelmingly what's out there is commercial money. But then if we start talking about digital currencies and specifically a digital euro are we then talking about a kind of digital equivalent of a banknote? Yeah that's a good simple definition. But let me distinguish these three functions of money briefly. Unit of account is given by the central bank today. It's not given by a precious metal coin or whatever as it was in the past. The store of value we can say that commercial bank money by far dominates central bank money because people hold much higher deposits with their bank side deposits in particular which are around 10 times what we hold in banknotes. But the third function is the means of payment function of money. And here still we have a predominance of banknotes of cash relative to commercial bank money which we typically use for payment in the form of cards or related payment solutions. So there we have in terms of value of payments currently an equivalence between the two or it may be that card payments have just overtaken cash payments in terms of value. In terms of volumes in shops in the euro area there's still 75% of payments take the form of cash and only 25% in the form of cards. And of course in other payment usages the electronic payments, commercial bank money payments have been predominating for a long time. For example when firms pay their supplier, pay their employees, pay taxes, they always pay electronically in commercial bank money. If we come now to the definition again of digital euro, I mean as you put it, it is banknotes in electronic forms and in the sense that banknotes have been accessible to all of us, every firm, every citizen, even every foreigner can hold euro banknotes. There are no restrictions while electronic central bank money so far could be held only by commercial banks in the form of deposits with the central bank and a so-called central bank digital currency. In our case a digital euro would combine the two. But accessible to everyone. Okay and it's sort of in the context of this rapid digitalization and people using electronic means of payment more often. But with the difference that you're getting access directly to so-called central bank money, we see a lot whenever we issue a report on the digital euro or wherever or we talk about this subject, we get lots of comments from people who are supporters of Bitcoin and other crypto assets. Now we already did a whole episode on that, of course, which you're welcome to go back and listen to. But I think what's maybe interesting here is how do we answer the question, well, if there are these other things out there like Bitcoin or Libra, why do central banks need to get involved and where do you see the difference there? Before talking about Bitcoin and Libra, let me come back to what you mentioned beforehand that people indeed pay more and more electronically. It's a clear trend that has been accelerated in recent years and even accelerated somewhat more with the COVID crisis and why is that so? So obviously electronic payments are convenient. You don't have coins, you don't have change, you don't have to go to an ATM and withdraw banknotes. And then there have been lots of technological advancements in recent years which made it even more convenient to pay electronically. For instance, contactless payments without a PIN code has recently been increased to a ceiling of 50 euro and biometric recognition allowing for contactless payments with mobile phones is of fantastic convenience now. So while on the banknote side you could say the technology hasn't changed for hundreds of years, if you pay with the banknotes it's still the same as if it was long time ago. So it's a bit an imbalance. One becomes more and more convenient, the other stays always the same, that naturally leads to a higher use of what is progressing and of course also for e-commerce you cannot use banknotes. So all of that creates a trend to electronic payments and then you mentioned crypto assets such as bitcoins and then also Libra which is a bit different. But bitcoins is not really, you know, we would say it's not money, it's fluctuating in its value. It is more like a commodity, you know, it fluctuates like oil or gold and it's not very trustworthy maybe. Some like it, some like the idea that it has no central authority or no private issue responsible for it. Some like it, others may say this is a bit, you know, special and I don't want it and it's not regulated anyway. So let's say the risk is really for the user, public authorities have no responsibility there. And Libra is a bit different. I mean first Libra is just a project for the moment. It doesn't exist yet. I think it is more similar at the end to commercial bank money because it contains a promise of convertibility into central bank money. It's not so different from commercial bank money but it tries to avoid the definition and so it is still quite unclear what it is exactly and regulation of it is still unclear. So and it's a future, you know, nobody has yet paid with Libra. Okay, but so I'm very happy actually paying personally with my card or my watch or my phone. Delighted recently to discover that my bakery will finally accept the watch as a payment method despite years demanding only banknotes. And that's a bit also driven by the coronavirus pandemic. It hasn't changed some of these payment styles. Even in Germany. Even here in Germany, exactly. So the change is really genuinely happening. In fact, when I told someone about that recently, they just didn't believe me that it was true. And I said I maybe should take a picture of it but I haven't done that. But the question is, so if I'm comfortable using my these commercial money solutions to do that, what's interesting about a digital euro? What would the benefits be or what are the different aspects of that brings? I mean all central banks including DCP have explicitly said they will continue issuing banknotes without time limitation but nevertheless usability of banknotes may at the end disappear because shops no longer want to accept them and most customers also don't want to use them. So in that case people would have to rely fully on digital payments and the payment industry is a network industry in which economies of scale imply that there will be always a high degree of concentration and of market power. So the payment market easily ends as an oligopoly or monopoly even and that means that dominant players can set high prices at the end, competition is missing and here the continuation of available central bank money for usage in payments would mean an outside option for citizens, for customers, which also put a constraint on the potential use of market power by those private companies which easily dominate the payment market. To add one thing, in Europe in addition we have the issue that the largest players are all foreign companies or subsidiaries of foreign companies and if we look at the trend they are further expanding market share and in a certain way payment is a strategically important economic function and it's not ideal maybe that this is in the hands of a few foreign or subsidiaries of foreign companies it just adds vulnerability for Europe which again speaks maybe for maintaining an outside option maintaining a means of payment, a universal one for which we have European monetary sovereignty also as a fallback solution. So it's about adding an option, it's about not taking anything away, it's not taking away banknotes, it's not taking away these private solutions but it's offering something else and it's a public solution and it's homegrown as it were. Exactly, I mean it's not to take away let's say the role of the private sector I think the private sector has offered again very convenient, impressive electronic payment solutions and the private sector will continue to play a very important role and commercial bank money is there to stay. Okay, so going back to my hypothetical visit to the bakery where I'm currently over and enthusiastically using my watch what would it look like with a digital euro, what would I do? I mean already now you may have different electronic payment solutions so that you could use in principle there so then there will be an additional one and you will decide on the basis of convenience or whatever comes to your mind which one you want to use. One reason you might want to use the digital euro could also be privacy if you don't like the idea that private solutions could use your payment data for customizing advertisements or whatever the digital euro would guarantee to not use your payment data but I think you can imagine it being one payment solution maybe you will have different payment apps on your mobile and the digital euro app could be one of them or it could be even integrated into private payment solutions that you could switch from between commercial bank money and central bank money or that we have still to explore. Okay, very interesting. We've talked about the positive aspects then, some of the advantages. What if I get super enthusiastic and decide well I like the sound of this central bank money, I've never heard of a central bank going out of business why don't I get rid of my bank account and have all my money in central bank digital currency in a digital euro, would that work? But I don't think that this would be a good choice really because we don't aim at substituting the private sector with all let's say its service offers and innovative power so my guess would be the private sector will remain much broader in its services and more efficient maybe so digital euro should provide basic payment functions and there it should be good, it should be as convenient as private solutions but I don't think we will offer a lot of value added services that you have with your bank account like I don't know possibility to purchase securities or possibility to convert into other currencies or regular transfers of money or direct debits I mean to be seen but there's no ambition let's say of central banks in general to offer all those services because the private sector it's a lot of work to offer them there's a lot of work to be in touch with clients when things go wrong and so on so we also have the idea to rely on the private sector for the front and for managing customer relations so banks have all those customer relations anyway they do due diligence identifying their customers doing anti money laundering counter terrorist financing all those things are done by the banking system and it's a huge workload a lot of people are working on that so it would be really efficient to recycle this work and maybe to put the front end in the hands of regulated entities like banks to not replicate everything and that's again an argument in favor of not expecting that the banks will lose business or other payment providers will lose business because it will be very reasonable to rely on them Okay so as you say I'm probably still going to need my bank account for all the things I need the bank account for today like making payments, transfers, receiving my salary that kind of thing, paying rent and also it's wide open what the design of the digital euro is and one possible answer is that it's a sort of back end and banks still provide a front end I mean can you talk us through a bit more some of the design choices that would have to be made here The back end technical solution is of course a big topic and we have started to think through it and if you read about central bank digital currencies in general people tend to mention two basic approaches one is a central ledger so a central system of accounts in which you would book every transaction and you would record all the positions of all the holders of digital euro that's let's say the traditional approach all the private digital payment solutions are in a certain way based on central ledgers on the other side what is mentioned often people believe that this comes naturally with central bank digital currency is a DLT distributed ledger technology which is also what is behind Bitcoin actually in some sense so there the idea is that it's a decentralized system without a central book and I mean all those things are very fascinating and we are working on them The personal intuition here is that the traditional central ledger technology and the idea of online based payments is a more obvious one also for a digital euro because it's well tested it is used for all the commercial bank payments today so the necessity to come also with a major innovation and the technological side is to be seen now Okay very interesting just to take a wider step back for a second I mean where do we sit sort of in international comparison terms I mean we're talking about the digital euro here but what sort of things are happening in other countries and jurisdictions Yeah a lot of central banks are looking into CBDC central bank digital currency 80% of central banks worldwide are engaged in CBDC work and also other big central banks like the Federal Reserve the Bank of England, the People's Bank of China and so on and the People's Bank of China is actually the most advanced of those large central banks so it has already deployed large scale experimentation so it is soon to be able as I understand to really issue a digital currency for users and the ECB maybe is a bit in the middle field here of central banks and one reason why we are not such a front runner maybe that the euro area is still relying heavily on bank notes there are differences between euro area countries but on average that's a fair statement and also we have a well functioning banking system so also commercial bank money and private electronic payment solutions are working pretty fine so from this perspective there was no urgency to now launch this project in the meantime when you see the trends in electronic payments you come maybe to different conclusions that now it is time to look into this to be prepared to be able to decide at some stage to issue digital euro even if currently still maybe there is no acute need to do so Okay and so I'm going back to the digital euro then what are the next steps? When will this be ready? That's a big question So far the ECB has issued its report as you mentioned on 2nd of October it was the first comprehensive official statement you could say of the ECB how it sees the topic of a digital euro but the next step would be likely to decide to go for a real project and that could be done maybe mid-off next year and this decision to go for a project would not be a decision to issue a digital euro but to really advance towards being able to do so because such large projects take typically a few years they can take 3, 4, 5 years so if we are forward looking we extrapolate trends then if we want to be prepared to really decide to issue and to issue in a few years then we should launch such a project in the meantime we have launched our public consultation that came out on 12th of October it's on our website and we'll definitely link to that in the show notes how long does that stay open for? That's for 3 months so it goes until 11th of January next year so there's enough time for everybody to look at it and it's really addressed not only to academia the financial sector or public authorities really to everyone so you will find questions that are more suitable maybe for one group than for the other but in principle everybody can answer to all questions we would of course hope for learning about their needs what value added they would see from a digital euro what front end solution they would expect what they find most convenient in currently existing private digital payment solutions so that we can learn how to design this to be really in the interest and be in demand of citizens Okay so as long as you are listening to this podcast before the 11th of January 2021 we absolutely would like to hear your views Ulrich thank you so much for your time today it's very interesting and good luck with the input from the consultation and all the work around it Yeah thanks Mike it was a pleasure That brings us to the end of this episode so we've heard that while the ECB needs to be prepared for the event that a digital euro is needed the plans are still at a fairly early stage and no decision has been taken yet on the contrary we're actually asking you to give feedback on a possible digital euro in the public consultation that we mentioned You can search online for digital euro and ECB and as I said we'll put something in the show notes I thank again Ulrich Binsal for joining the conversation and giving us his insights Do also look in the show notes for other links to related papers and publications from the ECB We'd love to hear your feedback and thoughts for future episodes via social media You've been listening to the ECB podcast with Michael Steen If you like what you've heard please do subscribe and leave us a review Until next time, thanks for listening