Last month, the Association of German Banks published a position paper on the digital euro, which was generally supportive of the central bank digital currency (CBDC) compared to another report from Germany’s community bank group that called out the dangers.
The question of a digital euro has been a matter of prolonged debate among German observers, and the report highlights some of the most contentious issues in the discussions. In particular, it stresses that the CBDC should only be brought into circulation by commercial banks who should be “appropriately compensated” for it. It wants to see limits on the amount that may be stored by retail customers and an outright ban on businesses using it as a store of value to counter the risks of bank disintermediation.
Overall, the community bank report sees a “multitude of opportunities” presented by the introduction of a digital euro. However, it argues that its success will depend on its ability to meet citizens’ needs. For example, it should be introduced as a “better form of cash”, able to be used securely by anyone at any time, including being available offline, and “as close to anonymity as the law permits”.
In light of this, the report argues that commercial banks should be the obvious choice for bringing the digital euro into circulation, given that “they know best what their customers need”. In practice, that means they want to be in charge of prioritizing use cases and designing appropriate customer service offers.
But because they would be helping the European Central Bank (ECB) to fulfill its public mandate, banks should not be expected to bear the implementation costs and instead be compensated for their contribution.
According to the authors, the European Payment Initiative (EPI), a pan-European payment system and interbank network, could be a fundamental building block. The EPI started as a network of 31 banks and two acquirers aiming to build a European card network to replace Visa and Mastercard. A year ago, 20 banks withdrew and the card concept was dropped. However, it pivoted to a digital wallet solution which could be handy for a digital euro. It appears the banks are keen for the ECB to stump up funding.
Additionally, the digital euro should be able to meet current as well as future market needs, with the private sector acting as the driver of innovation. In particular, the report highlights the need to balance privacy and security concerns, arguing that the CBDC’s guiding principle should be: “as much privacy as possible, as much anti-money laundering (and therefore infringement on privacy) as necessary”.
Lastly, the paper touches on some of the risks presented by introducing a digital euro, noting that the ECB still needs to analyze many of its consequences fully. One such threat would be the risk of disintermediation stemming from banks’ loss of customer deposits and the high cost of alternative bank funding, which would require limiting how much consumers and businesses may hold. Another would be the risk of falling revenues from the payments market, arguing that banks will have to come up with sustainable and innovative business models to survive.
A recent ECB paper on CBDC and financial stability found that higher CBDC remuneration would likely increase bank fragility. Nonetheless, banks could respond to the additional competition by offering higher deposit rates to retain funding, implying a U-shaped relationship between CBDC remuneration and bank fragility.