1 Welcome

Mr Balz,

Ladies and gentlemen,

It is my great pleasure to open the Bundesbank’s Payments Symposium and – just as I did two years ago – to give you all a warm welcome.

You, my dear guests, are the main reason for the conviviality of the atmosphere. I see many familiar faces, including Mr Thiele, whose post on the Bundesbank’s Executive Board is now occupied by Mr Balz, and Mr Yves Mersch. Yves, thank you very much for standing in for Sabine Lautenschläger here, even though you now have a different portfolio. This year’s event will again be emceed by Mr Otto – with his usual demeanour of calmness and confidence.

Payment systems and securities settlement are areas where technological change is making itself particularly felt. This puts the topic front and centre of our symposium. Of the rapid pace of progress, Albert Einstein is supposed to have said that someone who says it can’t be done is generally interrupted by somebody else who has just done it.

The origins of all technology go back to a mythical being, at least if ancient Greek mythology is to be believed. Prometheus, one of the Titans, stole fire from the gods and delivered it to humans. He thus gave humans not only warmth, light and protection from wild animals, but also the key to technological progress – such as making tools.

The punishment meted out to him by Zeus, the father of the gods, was gruesome. While Prometheus was chained to a mountain in the wilderness of the Caucasians, an eagle ate from his liver every day, which replenished itself every night. Yet for Zeus that was not enough. He sent the strikingly beautiful Pandora to punish humankind as well. Prometheus had warned his brother Epimetheus against accepting any gifts from Zeus. However, Epimetheus did not listen and wed Pandora. The gods had given Pandora a box full of all the world’s evils. Out of pure curiosity, Pandora opened the box, allowing all evil to escape and fly out to plague humanity.

This myth thus illustrates how progress can at once be a blessing and a curse. Expressed less epically: it has opportunities and risks. And this myth shows two different approaches: Prometheus means “Forethinker” in Greek, while Epimetheus represents “Hindsight”.

2 Possibilities of new technologies

2.1 Crypto-tokens and blockchain

Ladies and gentlemen, one particular source of risk to financial investors lies in what are known as crypto-tokens.[1] During our last symposium, the hype surrounding bitcoins and the like was only just gathering steam. The price of a bitcoin had climbed to a peak of over US$19,000 by December 2017. Joy at going from peak to peak didn’t last long: a year later, bitcoin was selling for less than US$4,000. On account of the highly volatile nature of their price, a current ECB report has classified such crypto-tokens as highly speculative.[2]

At all events, they do not perform the central functions of money in an economy. Their volatility means that crypto-tokens are probably suitable neither as a reliable store of value nor as a unit of account. And they are also rarely used as a medium of exchange because the transaction costs are often high and transactions take a relatively long time to be settled. One factor is the large amount of energy needed: according to one of our estimates, a bitcoin transaction early last year used more than 400,000 times as much electricity as a normal transfer. According to a BIS study published in 2019, of 63 central banks surveyed, none saw any significant use of crypto-currencies in their home country.[3] However, distributed ledger technology, on which crypto-tokens are based, remains intriguing.

At this same event two years ago, I spoke of the joint Bundesbank/Deutsche Börse blockchain project for securities settlement. I can now report to you on the progress made. For in autumn of last year we completed testing of the jointly developed blockchain prototype. The tested variants, on the whole, proved fundamentally suited to high-volume use. Compared with systems in use now, however, the blockchain solutions did not perform better across the board: settlement sometimes took longer and generated relatively high computational costs.

Experience elsewhere in the financial sector has been similar. For, despite numerous tests of blockchain-based prototypes, there has not truly been any breakthrough in terms of productive use. Although the new technology has a promising future, more developmental work will be necessary for it to be able to be used in practice.

2.2 Central bank digital currency

Ladies and gentlemen, for everyday payments, we Germans still tend to reach for cash. According to a Bundesbank study, 74% of recorded payments in the summer of 2017 were transacted in cash. This represents a 5 percentage point decline from 2014. At the same time, the share of debit cards in transactions went up. And more and more cardholders are noticing the speed and convenience of contactless payment.

Against the background of technical innovation and the growing popularity of cashless payments, central banks are also addressing the issue of central bank digital currency. Sweden is looking into the issue relatively intensively because the use of cash there has declined rapidly.[4] According to the Riksbank, in 2018 only 13% of survey respondents settled their purchases in cash, down from 39% in 2010. This confirms that, from a certain point on, cash use declines at a visibly accelerated pace, for which vanishing network effects are a potential explanation.

In some cases, it is no longer even possible for consumers in Sweden to pay in notes and coins: visitors to the popular ABBA Museum in Stockholm, for instance, have to use plastic or smartphones to pay the 250 kroner admission fee. But that’s not all: in many Swedish churches, one now sees “Kollektomaten” – a sort of digital collection plate outfitted with a card reader.

The purpose of the Swedish central bank’s “e-krona” project is to investigate whether a digital payment option in safe central bank money can be made available to non-banks. Due to insufficient performance, distributed ledger technology will not be used for now. The Riksbank has not yet decided whether or not to roll out the e-krona. Among the recommendations of the second project report, published in October of last year, is a pilot programme to develop any necessary technical solutions.

The introduction of central bank digital currencies should certainly be carefully considered.[5] The carelessness of Epimetheus and Pandora serve to warn us to be cautious. Depending on its specific shape, central bank digital currencies available to the general public could have severe impacts. They could affect the banking system, for one thing, as widely accessible central bank digital currencies could fundamentally alter banks’ business models and financial market intermediation. For another, the demand for central bank digital money could be greater, or more volatile, than that for cash, with effects on the central bank’s balance sheet to match. Third and last, in a crisis, the threat to financial stability could possibly be even more severe than today, as central bank digital currency would represent an additional, highly liquid and safe alternative for investors. Therefore, a “flight to safety” in general, or a digital bank run in particular, could occur faster and more extensively than in the past.

Ladies and gentlemen, these reservations should not be pushed aside lightly. And this is why, very recently, the BIS, the Basel-based central banks’ bank, has sounded a somewhat critical note. At all events, I believe that we central banks have a duty to provide the public with modern, fast and also internet-compliant payment media. It is about keeping our finger on the pulse and our eye on the state of the art in search of consumer-friendly solutions without unduly endangering financial stability.

2.3 TARGET instant payment settlement (TIPS)

That brings me to the topic of instant payments. Advancing digitalisation is increasingly making real time communication a reality, thanks to the likes of app-based messaging services. Similarly, music, files and other products that lend themselves to digitisation are being made available almost in an instant. It’s hardly surprising, then, that people are expecting to be able to pay in real time as well. That’s been possible on a broad scale for almost two years now, thanks to SEPA instant payments.

To process these transactions, the Eurosystem set up TARGET instant payments settlement – or TIPS, for short – last November. TIPS is a service that makes pan-European real-time payments settled directly in central bank money a reality. Operating around the clock, every day of the year, TIPS makes sure that the money is credited to the recipient in ten seconds or less and can then be put straight to further use.

Instant payments in general are expected to promote innovation and benefit consumers. That said, there is also the matter of countering fragmentation in the European payments space. The Eurosystem is now using its expertise and neutral status in the market to augment the infrastructures established by private operators for real-time payments, many of which cater for national markets, on a pan-European basis.

Banks have been pretty reluctant to embrace instant payments so far. And while that fits in with past experience that systems like these need time to find their feet, it would be good to see instant payments reach critical mass more quickly. Real-time payment systems look set to become the standard in Europe over the medium term. I also see potential when it comes to building bridges beyond Europe to other global systems, because international payments in particular are still relatively slow and expensive.

However, implementing instant payments also presents challenges and calls for additional investment. Payments in real time particularly raise the bar for banks’ fraud detection capabilities.

3 Cyber security

Quite apart from real-time payments, the shifting of activities into cyberspace is making the matter of security in the digital domain all the more pressing. The Bundesbank operates critical infrastructures that are of global significance and manages highly sensitive data. A failure of central bank systems might present a risk, not least to financial stability. That’s why cyber security is a matter of great concern for us.

Criminals are lurking in many corners of cyberspace, just waiting to pounce, and it takes foresight to always be one step ahead of them. You see, cyber attacks are becoming more frequent, more complex, more sophisticated and better organised.

Cyber criminals have also set their sights on the Bundesbank. In 2018 we registered 7.3 million internet visits and emails compromised by malware which we had to block internally, and 3.1 million unauthorised attempts to access our applications that we had to fend off. Our in-house team of experts – the Computer Emergency Response Team (CERT) – analysed nearly 6,600 events last year.

The fact that Prometheus managed to steal the fire suggests that the protective measures were not as good as they should have been. Epimetheus cast his brother’s warnings to the wind, making him the vulnerable point in the system which attackers could use to breach the defences.

Protective measures against cyber attacks are cyber hygiene and cyber resilience. Just as we brush our teeth or medical staff wash their hands, cyber hygiene is all about prevention – like sensitising employees to carelessness and also to attempts to use intimidation or threats to put people under pressure. Just think of the instances of CEO fraud – a ploy used to pressure company staff into immediately following what are purportedly orders “from the very top”, like instructions to pay huge amounts of money into foreign accounts, for example. This scam is thought to have cost one German car maker €40 million.

Cyber resilience, meanwhile, means the system’s ability to withstand cyber attacks, and providing particular protection for an organisation’s “crown jewels” is just one aspect of this. The first step here is to identify the organisation's most valuable treasures – its critical assets. I won’t be telling you anything new when I say that the payment systems are part of the Bundesbank's crown jewels.

Uncovering vulnerabilities is also the purpose of what is called red teaming, or ethical hacking. These red teams are independent security experts who use a malicious hacker’s tactics to simulate attacks on an organisation. Their aim is to get to the core of that organisation’s systems. The task of the defending blue team is to fend off the assault. Blue team members primarily include the target organisation’s IT experts but, ultimately, the entire staff. You see, there are many potential vulnerabilities – an attacker might come disguised as a window cleaner to snoop for intelligence or as a head hunter sending out infected emails.

The European Framework for Threat Intelligence-Based Red Teaming – or TIBER-EU, for short – is a uniform framework formulated by ESCB central banks that was published in May last year. Its purpose is to use red team testing as a way of helping entities from the financial sector achieve the highest level of resilience against cyber attacks. National authorities can now adopt TIBER-EU on a voluntary basis.

In my opinion, adopting this framework in Germany would be a valuable step towards strengthening the cyber resilience of entities across the financial sector. The Bundesbank is already engaged in dialogue with other authorities in an effort to map out a suitable path for implementing TIBER-EU.

4 Making Europe stronger

Ladies and gentlemen, Prometheus may have been the founding father of our culture back in the mists of time, but the foundation stone for the process of European union was laid much more recently – just under 70 years ago, in fact, when France’s then foreign minister Robert Schuman made his famous declaration. Much has been achieved since then. One undeniable success story is the single market we share. Not only does it offer consumers a greater choice of products at lower prices; it has added significantly to gross domestic product in the EU – recent studies put the gains at between around 2½% and 4½%.[6]

And our single currency has also demonstrated its stability credentials – euro area inflation over the last two decades has averaged 1.7%. Unsurprisingly, the euro enjoys high public acceptance. One survey has found that the euro’s public approval levels have never been better, with three out of four respondents saying that having the single currency is a good thing – in Germany, approval rates are as high as 81%.[7]

And there are still areas in which an even better integrated Europe could make life better for the general public. One is the capital markets union.

Establishing a European single capital market would stimulate both cross-border investment and private risk sharing. These transmission channels could be used to strengthen the forces of growth and do a better job of cushioning economic shocks. This shock absorber function can be seen in the United States, where an integrated capital market distributes nearly half of the impact of a shock across state borders – far more than fiscal transfers there do, in fact. In the euro area, by contrast, just one-tenth of a shock is absorbed by such a private risk sharing arrangement.[8]

One step that would push ahead with the capital markets union would be a further standardisation of the existing national provisions. Now, achieving comprehensive harmonisation in legal areas such as insolvency law might prove difficult, but finding a solution for specific items would already be a big step forward.

As a case in point, the European Commission has tabled an action plan to facilitate swifter out-of-court collateral enforcement. Establishing minimum European standards in this area could help banks get non-performing loans off their books more quickly.

The treatment of crypto-tokens and initial coin offerings (ICOs), on the other hand, is an area where it would be desirable to have a uniform European regime in place from the outset. These are just two areas where capital market integration can be deepened in Europe.

5 Conclusion

Ladies and gentlemen, technological advances open up opportunities, and they also harbour risks. Prometheus and Epimetheus vividly illustrate these two sides to progress and ways to deal with them.

The myth has been retold and interpreted in different ways over time. What was important to Plato was that while human beings were able to use Prometheus’s techniques and teachings to build cities, they were unable to live in them for long. You see, they were still lacking the ability to live together as a social group and organise a community. It was only the gods who gave human beings – all of them – this ability.[9]

Communication and cooperation are not only crucial when it comes to shaping technical transformation in a responsible manner – for us, they are also hugely important qualities for strengthening Europe as one.

I wish you a pleasant and informative symposium. Thank you for listening.

Footnotes:

1. See Deutsche Bundesbank (2019), Crypto-tokens: current developments and their implications for financial stability, Annual Report 2018, pp. 26-28.
2. See ECB Crypto-Assets Task Force, Crypto-Assets: Implications for financial stability, monetary policy, and payments and market infrastructures, Occasional Paper Series, No 223, May 2019.
3. See BIS, Proceeding with caution – a survey on central bank digital currency, BIS Papers No 101, January 2019.
4. See Riksbank, E-krona project, report 2, October 2018.
5. See BIS, Central bank digital currencies, report by the Committee on Payments and Market Infrastructures and the Markets Committee, March 2018.
6. See G. Mion and D. Ponattu (2019), Ökonomische Effekte des EU-Binnenmarktes in Europas Ländern und Regionen, Bertelsmann Stiftung; T. Mayer, V. Vicard and S. Zignago (2018), The cost of non-Europe, CEPII Working Paper; and G. Felbermayr, J. K. Gröschl and I. Heiland (2018), Undoing Europe in a new quantitative trade model, Ifo Working Paper.
7. See Kantar Public (2018), Public opinion in the European Union, Standard Eurobarometer 90.
8. See C. Alcidi, P. D’Imperio and G. Thirion, Risk-sharing and consumption-smoothing patterns in the US and the euro area: a comprehensive comparison, CEPS Working Document No 2017/04.
9. See H.-U. Nennen (2018), Der Mensch als Maß aller Dinge? Über Protagoras, Prometheus und die Büchse der Pandora, Zeitgeister 1, Hamburg.