The German Banking Industry Committee states decisive challenges on the Digital Euro

Currently, the European Central Bank (ECB) is actively working on a Digital Euro as a form of Central Bank Digital Currency (CBDC) for citizens, which is intended to be introduced as a digital complement to existing cash by 2026.
11. September 2023

In addition to the ECB’s efforts, the European banking industry is focusing on the needs of the industrial sector, developing a „Giralgeldtoken“ as a tokenized bank deposit. This is designed to meet the demand for automated payment transactions, for instance, on a blockchain. The Giralgeldtoken facilitates the implementation of Smart Contracts, Machine-To-Machine Payments, Pay-per-Use, and other advanced processes of Industry 4.0, thereby making a significant contribution to the further development and digital transformation of the economy and society. New forms of money open up new possibilities. However, they also represent a fundamental policy intervention in the established and proven monetary system within the Eurozone. It is essential to carefully examine the associated impacts to optimize the opportunities these new monetary forms offer and effectively mitigate potential risks.

The idea behind CBDCs is straightforward: to create a digital form of the traditional currency that can coexist with cash and other types of money. This digital version can be used in online transactions or potentially even offline transactions and is backed by the trust and authority of the central bank. For instance, a digital dollar would be a CBDC for the United States, while a digital euro would represent the Eurozone’s CBDC. The centralization of CBDCs offers a unique blend of advantages. With the central bank maintaining full control over its issuance, distribution, and monetary policy implications, CBDCs can offer a level of stability that decentralized cryptocurrencies might not guarantee. This control also provides the opportunity for improved financial system efficiencies, as CBDCs can potentially offer faster and more secure transaction methods, reduced operational risks, and lower transaction costs. Beyond efficiency, CBDCs could play a pivotal role in enhancing financial inclusion. In many regions, there are populations that remain unbanked or underbanked, having limited access to essential financial services. CBDCs, accessible through smartphones or other digital devices, can bridge this gap, allowing more people to participate in the economic system.

However, the journey of CBDCs is not without challenges. The German Banking Industry Committee (DK), which includes the associations of cooperative banks, savings banks, public banks, German mortgage banks, and the Federal Association of German Banks, has expressed significant concerns in a new position paper about the Brussels‘ proposals. The DK argues that the ECB should issue the digital Euro merely as a form of payment, not as a payment system. If the digital Euro were designed similarly to cash, it would receive the support of the DK, as clearly stated in the position paper. It is emphasized that while the issuance of currencies is the responsibility of the central bank, the development of payment systems should remain with the banking industry. Otherwise, existing and future private-sector European payment systems could be at a disadvantage. This would undermine the purpose of the digital Euro, which includes strengthening Europe’s autonomy.

In addition to this, the DK emphasizes the need for a legally sound, low three-digit upper limit for holding the digital currency and a ban on its interest accrual. This is to prevent the digital Euro from being primarily used as an investment, as its main purpose is digital payment. Banks are concerned that a shift from traditional deposits to digital wallets could impact credit lending (referencing the term transformation) and potentially harm the economy. The DK also suggests a transaction limit, calls for flexibility in the acceptance obligation, and underlines that pricing should be left to the market. Legislatively set prices would infringe upon the autonomy of the involved parties and would be inappropriate given the existing competitive landscape.

The DK supports the envisaged role of banks and savings banks in the context of the Digital Euro, emphasizing the need for clear legal guidelines regarding role distribution. Given their existing customer relationships and established procedures, including regulatory requirements like customer identification, credit institutions are ideally positioned to provide users with access to the digital wallets they offer, thus facilitating the use of the Digital Euro. However, there’s a need for clarity regarding the current blurring of regulatory distinctions between credit institutions, e-money institutions, and payment service providers, especially concerning the EZB’s requirements for the distribution and settlement of the Digital Euro. Currently, only credit institutions have access to digital central bank money, which comes with strict regulatory demands. Fair competition must be ensured, among other reasons, to protect consumers. The DK endorses the EZB’s ambition to make the Digital Euro as user-friendly as possible. Yet, this is associated with costs for credit institutions, especially if the Digital Euro can also be topped up using cash. This is all the more relevant against the backdrop of mandatory real-time transfers or forward-looking payment solutions like the European Payments Initiative (EPI).

Many central banks are already on the path of research and experimentation with CBDCs. The approach, design, and potential use cases vary by country, reflecting different economic conditions, objectives, and technological infrastructures. In the broader picture, while the likes of Bitcoin and Ether introduced the world to the concept of digital currencies, CBDCs represent an official acknowledgment and adaptation of this concept by sovereign states. They symbolize a potential new chapter in the history of money, melding the age-old trust in central banks with the efficiencies of the digital age. As with any innovation, CBDCs are accompanied by both enthusiasm and caution. Their successful implementation requires balancing the opportunities they present with the challenges they pose. The road ahead is filled with exploration and learning, but CBDCs undoubtedly hold the promise to reshape the contours of the financial landscape. Therefore, the position paper of DK provides valuable points of criticism for a successful launch of the digital Euro, revealing numerous questions that still need to be addressed and the complexity of this endeavor. In an international comparison, for instance, Europe lags significantly behind the research efforts of the People’s Republic of China, which has been researching and testing the digital Yuan for years. Yet, they have so far not managed to achieve successful adaptation. This underscores the challenging design and implementation of a new digital currency.

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