Yesterday, the European Banking Federation (EBF) published a report on its vision for a future digital money ecosystem, where a retail digital euro, a wholesale central bank digital currency (CBDC), and bank-issued money tokens all play important roles.
The EBF report laid out some of the main principles to ensure that the digital euro can meet evolving needs, add value to customers, and mitigate potential risks, including the idea that banks gain access to individuals’ payment data.
It agreed with many of the ECB’s policy objectives with the digital euro, but insists “that intermediaries have access to payment transaction data in the same way as they currently do for digital payment means.”
Balancing consumer privacy with banking practicality
Indeed, many in the banking industry would agree with such a request, as payment data enables value-added services and tools, which are important sources of bank revenues.
Additionally, access would still be governed by existing frameworks such as GDPR, AMLD, and PSD2, so consumers would still have legal protections and it would enable banks to fulfil legal compliance obligations, including anti-money laundering (AML) .
However, Europeans have made clear that any digital currency must be privacy-preserving. That means the central bank doesn’t plan to see all transaction data. At the same time, the ECB has said complete anonymity – as with physical cash – is not an option for AML reasons. It remains to be seen if anonymity might be possible for low value transactions.
Earlier this month, a position paper by the Association of German Banks argued that the CBDC’s guiding principle should be “as much privacy as possible, as much anti-money laundering (and therefore an infringement on privacy) as necessary”. Germans, in particular, have reiterated that they want their payments to remain a private matter. So if a digital euro is intended to function as digital cash, there is an ongoing friction between consumer desire for anonymity versus bank desire to access to private payment data.
Will a digital euro make European payments less reliant on Visa/Mastercard?
The paper also touched upon one of the ECB’s key policy objectives for issuing a retail CBDC: strategic autonomy. In general, it agrees that a retail digital euro might support the goals of “strategic autonomy of the EU payments market, monetary sovereignty and offering an alternative to other forms of digital money,” as ECB president Christine Lagarde recently argued. But it also warns that a CBDC alone will not make Europe less dependent on foreign payment providers without explicitly mentioning Visa and Mastercard.
That has a lot to do with the front end. Nowadays, consumers use cards and merchants accept them because they are convenient for making payments. Some CBDCs will likely be card-based too, but wallets will become the main interface for digital currency.
The key question is who will provide that wallet infrastructure. Visa and Mastercard have it in their sights. They have launched CBDC platforms to support banks and central banks and have been involved in CBDC trials and challenges. But the bank-backed European Payments Initiative is also developing wallet infrastructure. And the Association of German Banks recently noted that perhaps they should be compensated for that investment.
Banks as the ECB’s digital euro partner
Lastly, the EBF report called for a closer public-private partnership between EU authorities and market participants with a three-layered digital euro scheme. At the top, there would be the ECB, which would be in charge of defining aspects related to the issuing, convertibility, and maintenance of the digital euro. Below, the paper envisions a first industry layer similar to the SEPA schemes, with financial institutions involved in defining rules on payments and related aspects. At the bottom, another industry level of private-sector actors enables innovative, value-added services and ensures the interoperability of the various payment solutions.
The report concludes, “a retail digital euro should be developed with strong market involvement, in a full and transparent public-private partnership.” This way, the EBF argues, the ECB will ensure that it can:
- Create value for end-customers and the broader economy;
- Preserve financial stability and banks’ intermediation role;
- Incentivize robust business models for intermediaries;
- Balance privacy and security concerns; and
- Leave room for private-sector actors to develop innovative solutions and services.
For its part, the ECB is also keen on public-private collaboration.