Like many central bank digital currency (CBDC) designs, the digital euro plans to be distributed via intermediaries. In an opinion piece in the Frankfurter Allgemeine Zeitung, Manual Klein and Dr. Alexander Bechtel argue for greater control over the user interface by banks and payment providers rather than the European Central Bank (ECB). The former colleagues were writing in their personal capacity but work for the Deutsche Bank Group.
While they make persuasive arguments, they skip over the reason this is so critical for banks. Economically, the digital euro looks somewhat questionable for banks. By retaining control over wallet designs, banks get a strong foothold in a digital asset future. Wallets will become their customer’s primary viewport to their wealth. It’s not about the digital euro but about what might sit alongside the digital euro in the future. That includes bank accounts, tokenized securities, funds or a mortgage.
The digital euro’s business model may not prove lucrative to banks. Merchant fees are capped, the banks have to incur technology and customer compliance costs, and the draft digital euro legislation requires them to provide free services. Not to mention that some of their deposits will migrate to the CBDC.
There are two routes for banks to turn it around economically. One is to provide wallets. The other is to offer added value services, taking advantage of programmability and atomic settlement.
The digital wallet issue
The authors note that the draft laws for the digital euro require that the “app developed and provided by the ECB should serve as the dominant front end”. That’s an interesting point, so we looked it up.
The wording of the draft law preamble sounds very reasonable at the start. It says the private sector can provide alternatives. However, it ends by requiring the ECB option always be offered to end users. That rather favors the ECB wallet in an almost anti-competitive manner.
Article 28: Front-end services to access and use the digital euro
- Payment service providers distributing the digital euro shall provide digital euro users with the choice of using the following digital front-end services to allow digital euro users to access and use digital euro payment services:
(a) front-end services developed by payment service providers; and
(b) front-end services developed by the European Central Bank.
Where a payment service provider does not offer a digital euro front-end service, a European Central Bank’s service shall be used by such payment service provider.
Klein and Bechtel continue, “The ECB plans to provide a clearly defined range of functions for front ends, which will limit the ability of payment service providers and banks to develop their own solutions.” They’re concerned this could inhibit innovation going forward.
Additionally, they politely raise the point that “It is usually not part of the role of a central bank to compete with the private sector for innovative payment solutions for end customers.” It’s polite because it doesn’t mention the conflict of interest that all central banks have with retail CBDCs. They act as both the regulator of banks and their competitor. The Institute of International Finance highlighted that point in a recent note .
Last month we reported that Europe’s supervisors are concerned about the draft laws giving the ECB too much leeway. Flexibility makes sense for a regulator, but not so much for a retail solution provider, which the ECB will become.
Meanwhile, in other jurisdictions there are different wallet threats for banks. For example, in Israel’s joint CBDC Project Sela with Hong Kong, they don’t intend to rely on banks and existing payment providers. Instead, they plan to open up the provision of wallets and KYC to a broader selection of solution providers, with the intent of vastly expanding wallet competition.