Speaking at a virtual conference devoted to the topic “Fintech and the global payments landscape”, Bundesbank President Jens Weidmann argued that the development of central bank digital currency (CBDC) is not an end in itself. Issuance of CBDC should only go ahead if the perceived benefits outweigh any potential drawbacks or risks, he remarked, stressing that a digital euro must provide a clear value added to euro area citizens.

He noted that CBDC is often expected to lower transaction costs and raise efficiency in payments, financial markets and the real economy, and that it could also stimulate innovative services and give rise to new business models. At the same time, a digital euro would enable consumers and businesses to pay with central bank money in a digital environment. “This is a unique feature that the private sector cannot replicate,” said the Bundesbank President at the joint event co-hosted with the People’s Bank of China.

Risks for the financial system

Mr Weidmann pointed out that CBDC might, at least to some extent, take the place of bank deposits and, as such, may entail risks for the functioning of the financial system and the implementation of monetary policy. On the other hand, it could spur competition among banks and promote new services, he acknowledged. CBDC needs to be sufficiently attractive for users to accept it but, at the same time, should not be too attractive as otherwise it could disrupt the financial system. As far as Jens Weidmann is concerned, a gradual approach might make sense given the risks involved. That would mean equipping the digital euro with a specific set of features to start off with and building in the option of adding further functionalities at a later time.  

The Eurosystem will also be investigating the potential for innovations beyond CBDC and continuing to enhance its existing payments infrastructures. “We should make sure that our activities in the field of digital currency do not discourage the private sector from developing convenient and efficient applications for consumers and businesses,” cautioned Mr Weidmann. He explained that central banks are tasked with providing critical infrastructures as a basis for private actors to develop and supply their services and, in so doing, acting as a catalyst.

Cross-border payments require interaction between different systems

Mr Weidmann highlighted that the ability to use CBDCs in cross-border payments would heighten their appeal, pointing out that such transactions are relatively inefficient and expensive at the moment. But a set-up of that kind would require international and multilateral collaboration. “In my view, it is crucial that CBDCs function together, not against each other. Enabling cross-border payments through interoperability should be an important element of all the ongoing discussions on CBDC,” summed up the Bundesbank President.

A digital euro could help safeguard trust

Mr Weidmann went on to talk about how private stablecoin initiatives have, in recent years, intensified concerns about the increasing role of bigtech firms in payments and their growing market power in general. “If competition is hampered by the rising market power of bigtech firms, this needs to be addressed by competition law and policy.” The huge volumes of customer data being processed can help established platform providers to secure a competitive edge in other markets, he warned. And this is another area where a digital euro could provide some benefits. The Eurosystem has no commercial interest in user data or behaviour. “A digital euro could therefore help to safeguard what has always been the essence of money: trust,” Mr Weidmann reasoned.

Balz: diversity of providers and services is what is needed

Talking about the digital challenges facing financial services providers, Bundesbank Executive Board member Burkhard Balz explained how availability and security are key requirements that IT infrastructure needs to meet in the world of payments. “But questions surrounding data protection, environmental sustainability and the balance between public supply and private provision have to be answered as well,” Mr Balz pointed out in his closing remarks to the conference. For that reason, “one size fits all” solutions on a global scale are not just around the corner, even if there are major platform operators whose aim is to process more and more customers and services worldwide exclusively through their systems. “We need competition between systems and a diversity of providers and services,” stressed Mr Balz, explaining that this makes payments around the world more resilient to disruptions and helps cushion the impact when individual pieces of infrastructure experience bottlenecks and downtimes.